Why Climate Change Mitigation Policies Will Always Fail

All climate mitigation policies will be of net harm to any country implementing them. There are three reasons for this.

First, mitigation policies will not eliminate all the projected harm of climate change. Policy replaces the unmitigated cost of climate change with a policy cost and a residual climate change cost.

Second, policy proposals are only for the rich countries to reduce emissions and emerging economies to constrain the growth. That means residual climate change costs will be greater, and the burden of cost of reductions will fall on a number of countries will a minority of, and a rapidly diminishing share of, global emissions. Even with the rich nations all succeeding in the British target of 80% reduction by 2050 will still mean global emission levels higher than currently.

Third, there is mounting evidence that actual mitigation costs per tonne of CO2 equivalent saved are considerably more than the economic models assume.

 

Introduction

The Stern Review Summary of Conclusions stated on page vi

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.

The Review further stated on pages xvi-xvii

Preliminary calculations adopting the approach to valuation taken in this Review suggest that the social cost of carbon today, is of the order of $85 per tonne of CO2……. This number is well above marginal abatement costs in many sectors.

Many objections to the report look at the cost of climate change. Little discussed are the theoretical issues in implementing a successful policy. By “successful” I mean where the expected outturn of the policy is less than the projected costs of climate change.

 

The basic case

As the Stern review is saying that globally we should replace one set of costs – the projected costs of climate change – will the much lesser costs of climate. Graphically, we replace the climate change costs in blue with policy costs in orange. Costs are positive and benefits negative.

The case for policy is clear.

 

Climate change costs not completely eliminated

Peter Lilley, in his 2012 GWPF report “WHAT IS WRONG WITH STERN?” states on page 8

The benefit of preventing (climate change) entirely would, on his figures, be at least 5% of GDP – but to do so would require not just stopping all further carbon emissions but removing all those accumulated since the industrial revolution. The action he proposes to reduce the worst impacts of global warming by stabilising the atmospheric concentration of greenhouse gases at 550 ppm would, using Stern’s methodology, save some 3.1% of GDP – not 5%.

The mitigation policy seeks to stabilize total greenhouse gas levels are a level equivalent to about double the level of CO2 in 1780.


The case for policy is still clear.

 

Rich Countries Policy Burden

It is accepted that

  1. Rich countries are responsible for most of climate change.
  2. The adverse consequences of unmitigated climate change will be disproportionately endured by the less developed nations (LDNs).

Therefore the moral argument is that the rich countries should bear the cost of policy and they should compensate the LDNs for the future harm that they will endure. The compensation could then be used to offset the harm of climate change.

Rich countries have a smaller population than the LDNs. The policy costs (in orange) for them will more than double. Similarly, compensation (in burnt orange) will be much larger for the rich countries to pay out than for the LDNs who receive it in income. Finally the post-policy climate change costs (in blue) will be still larger for the LDNs.


The rich countries may or may not be better off after policy. Further the LDNs still suffer some harm.

 

Increasing Emissions amongst the emerging nations

Policy must include the emerging nations. This is why.

I have arbitrarily split the countries of the World into three groups

  1. ACEJU – The big industrialised carbon emitters – Australia, Canada, EU, Japan and USA.
  2. BICS – The large emerging nations of Brazil, India, China and South Africa.
  3. ROW – Rest of the World.

The World Bank has data on CO2 emissions by country for the period 1990 to 2010. From this, I compiled the following graph.


In the period 1990 to 2010, annual global CO2 emissions increased by 11.4 billion tonnes, or 51%. To return to 1990 emissions levels would require one group to cease emissions entirely and the other two groups to maintain emissions at 2010 levels. The future emissions growth path potentially makes the problem worse. Consider the comparative growth in population.


Despite the BICS countries increasing its emissions by 230%, emissions per capita are still less than 40% of those of the ACEJU block. Further, the explosive growth of the BICS has not been matched by the Rest of the World. Here the emissions have grown by 45%, but population has grown by 42%. Emissions per capita are still only 35% of those of the AJEJU block.

Any policy reductions by the rich nations will be more than offset by future emissions growth in the rest of the world. There will be little reduction in climate change costs, for either the policy countries or non-policy countries. The situation becomes like this.


The non-policy countries will still see a reduction, but that might be small, even if the policy countries are successful. The disadvantage to the policy countries is inversely related to proportion of global emissions they have at the end of the policy. That in turn is influenced by the future emissions growth in the non-policy countries, as well as the proportion of global emissions in a baseline year.

 

Peer-reviewed costs of Climate Change and Actual Costs of Mitigation

The Stern review should not be taken as the only source. The UNIPCC AR4 Summary for Policymakers in 2007 stated on page 22.

Peer-reviewed estimates of the social cost of carbon in 2005 average US$12 per tonne of CO2, but the range from 100 estimates is large (-$3 to $95/tCO2).

The average social cost is just a seventh of the Stern Review, which was not a study that has been peer-reviewed.

In a previous posting, I calculated that the subsidy of offshore wind farms was equivalent to 3.8 times Stern’s social cost of carbon, and 27 times that of the $12 average of peer-reviewed studies quotes by the UNIPCC. This was a low estimate, not including transmission costs. There might be cheaper ways of abating CO2, but there are lot of failed policies as well. There is also the impact on economic growth to consider, which for emerging economies. So a more realistic situation of a “successful” mitigation policy will look like the one below. That is “successful” in achieving the emission reduction targets.

Points for further investigation

There are a number of issues that are raised in my mind that need further work.

  1. The social cost of carbon defines the expected harm from climate change per tonne of CO2. If a country has quantitative emissions reduction targets, then an absolute upper limit in annual spend can be defined when achieving that target.
  2. This would enable identification of the success of policies within a national plan, along with the overall success of that plan.
  3. The expected CO2 emissions growth in non-policy countries, along with including other greenhouse gas emissions within the analysis.

     

Conclusion

There is no combination of mitigation policies that can produce a less costly outcome than doing nothing. Any government unilaterally (or as part of group representing a minority of global emissions) pursuing such policies will be imposing net harm on its own people, no matter how large the claimed potential impacts of climate change. This conclusion can be reached even if the extreme views of the Stern Review are taken as the potential costs of climate change.

Kevin Marshall

 

Notes

The comparison of emissions growth between countries is derived from “The Climate Fix” by Roger Pielke Jnr. This enlarges on a comment made at Australian Climate Madness blog.

All first time comments are moderated. Please use the comments as a point of contact.

Update 25/02 17.30. Summary and “Points for further investigation” included, along with text changes

Richard Lindzen attacked for dissention

Rather than substantiating the weaknesses in their own case, the climate community is continuing their attack on the dissenters. The latest is in the New York Times on Prof Richard Lindzen of MIT. I have posted the following on Prof Roger Pielke Jnr’s blog

Having listened to some of Prof Lindzen’s speeches and read some of his more populist articles, this attack on him leaves out 2 things. First, it omits one of his favourite words “feedbacks”. Second it leaves out the scale of the difference. Lindzen claims agreement with mainstream scientists that a doubling of CO2, on its own, would raise temperatures by around 1.2 celsius. Whereas Lindzen claims evidence that cloud “feedbacks” more than halve the impact, the consensus of climate models such positive feedbacks of up to three times – with wide variation. The evidence supporting this is patchy, a message implicitly admitted in the article. The lack of substantiation in this key area is crucial. If makes the extreme warming claims uncertain. If one the looks at the expected economic costs of “doing nothing” (like the Stern Review) this uncertainty in the projections should carry a risk weighting.

As a comparison, I would direct readers to Prof Lindzen’s talk at the House of Commons in February of this year. On Youtube, a response here, and Lindzens rebuttal reply at the GWPF.

When the main effort is on silencing dissent, rather than substantiating their own case, it implies to me that the climate consensus has a weak case – and they know it.

Joseph Stiglitz on the causes of the current crisis

Roger Pielke Jr. takes a critical look (here and here) at a novel theory of the recession from Nobel Laureate Joseph Stiglitz in Vanity Fair, the eminent economics journal. This is an extended version of the comment that I made on the second posting.

The Stiglitz theory would make a bit of sense if it were not for what he misses.

  • Your evidence that other countries, like, Germany, have similar increases in productivity but not the endemic problems.
  • That output per capita is identical in National Income Accounting with income per capita. Therefore, the long term rise in per capita income is a result of increased productivity per capita.
  • Since the start of the industrial revolution, real per capita output has risen (in the wealthy economies) more than 200 times. If there has been no corresponding increase in per capita income, unemployment would be greater than 99%.
  • Stiglitz quite rightly points to the rise in personal debt. He makes no mention of public sector debt. In the USA and in Britain in the period 2000 to 2007 government finances swung from a small structural surplus to significant structural deficit. If deficit-financed investment is expansionary, it was not just the low interest rates that kept the boom going but the fiscal stimuli. Similar structural deficits were present in many European countries like Greece, Portugal and Italy.
  • In the 1990 Japan entered a prolonged slump. In the following decade the economy stagnated despite huge public works investment like Stiglitz advocates. The Japanese national debt spiralled to 300% of GDP, with nothing to show for it, except a lot of fantastic roads to nowhere.
  • Japan was fortunate in that its borrowings are at near zero interest rates. The European economies are not so fortunate. Those European economies with large deficits reached a crisis tipping point when interest rates exceeded 7%. To save the economy, radical contractionary policies have been implemented.

I would therefore contend that Keynesian fiscal expansion in the USA or elsewhere would not only be ineffective (coming on top of other fiscal expansion), but carries a huge risk of making matters dramatically worse. Morally I believe that economic policy-making has a powerful analogy to medical practice. It is not just a matter of diagnosing properly the type and extent of the ailment. It is providing, at a minimum, a remedy for which there is a reasonable expectation that the patient will be better off being treated than not. Like with a GP, an economist has a duty of care in what they advocate, particularly when there are very clear and evident risks. Joseph Stiglitz seems to take no such care.

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.

Climate Change – Evaluating the Evidence

Roger Pielke Jr. reports here that the Australian Prime Minister proposes to form a citizens’s assembly on climate change. She says

And so today I announce that if we are re-elected, I will develop a dedicated process – a Citizens’ Assembly – to examine over 12 months the evidence on climate change, the case for action and the possible consequences of introducing a market-based approach to limiting and reducing carbon emissions.

 

Pielke finds problems with the last part. My problem is with examining the evidence on climate change. Given that the climate science is highly polarised, with a lot of complex arguments, this is not something that your average citizen can pronounce upon. Also, given that on one side you have a consensus of experts pronouncing the science is settled, with it being widely promoted that the opposition are just spokespeople for the fossil fuel lobby, there will be a vast majority in support of action and a small minority of dogged skeptics.

The only way for a consensus to be formed objectively is for the panel to act as a jury, with

  1. Clear guidelines as to what constitutes evidence, and levels of evidence to sort out the facts and strongly-verified science, from the, weak circumstantial evidence, and hearsay.*
  2. For a clearly defined barrier to establish the need for action. Like in a criminal trial under English common law, where you have to establish beyond reasonable doubt. The barrier may be set lower (like in civil cases), but it still needs to be there.
  3. To clearly separate the science from the policy. That is to clearly take into account the costs, benefits and risks of policy changes.

 

*To be clearer, the levels of evidence in decreasing order are.

  1. Facts
  2. Established or independently verified (& not rebutted) science.
  3. Peer-reviewed statistically verified science.
  4. Other peer-reviewed science based on circumstantial evidence.
  5. Papers by advocacy groups.
  6. Hearsay. E.g. “The vast majority accept…..”