Category — Climate economics
Tom Friedman Has a Standing Invitation to My Weekly Poker Game: The Abused Insurance Analogy for Climate Change
It is amusing to watch advocates of rapid, aggressive carbon dioxide emissions reduction, when confronted with the plain facts of the consensus scientific projections for climate change and its associated damages, move from “science says we must do this or die” to “well, actually, the science is pretty uncertain, so it’s possible that we might die,” and then proceed to some restatement of Pascal’s Wager.
Tom Friedman’s recent New York Times column is a perfect illustration of this logic. I’ll quote him at length, before demonstrating that his emission-cuts-as-insurance analogy breaks down once you plug in actual numbers:
This is not complicated. We know that our planet is enveloped in a blanket of greenhouse gases that keep the Earth at a comfortable temperature. As we pump more carbon-dioxide and other greenhouse gases into that blanket from cars, buildings, agriculture, forests and industry, more heat gets trapped.
What we don’t know, because the climate system is so complex, is what other factors might over time compensate for that man-driven warming, or how rapidly temperatures might rise, melt more ice and raise sea levels. It’s all a game of odds. We’ve never been here before. We just know two things: one, the CO2 we put into the atmosphere stays there for many years, so it is “irreversible” in real-time (barring some feat of geo-engineering); and two, that CO2 buildup has the potential to unleash “catastrophic” warming.
When I see a problem that has even a 1 percent probability of occurring and is “irreversible” and potentially “catastrophic,” I buy insurance. That is what taking climate change seriously is all about.
Computing the Odds
The United Nations Intergovernmental Panel on Climate Change (IPCC) is the leading bookie for this game. The current IPCC consensus forecast is that, under fairly reasonable assumptions for world population and economic growth, global temperatures will rise by about 3°C by the year 2100 (Table SPM.3). Also according to the IPCC, a 4°C increase in temperatures would cause total estimated economic losses of 1–5 percent of global GDP (page 17). By implication, if we were at 3°C of warming at the end of this century, we would be well into the 22nd century before we reached a 4°C rise, with this associated level of cost. [Read more →]
December 17, 2009 13 Comments
But even if the IPCC’s iconic statement were correct, it still would not be cause for alarm….The potential (and only the potential) for alarm enters with the issue of climate sensitivity—which refers to the change that a doubling of CO2 will produce in [global mean temperatures]. –Richard Lindzen, Wall Street Journal, November 30, 2009
Defenders of the IPCC position on climate science have adopted different strategies in dealing with the scandal of the CRU emails and computer code. Some authoritative voices, notably Judy Curry, have engaged in dialog with skeptics and have reassured PhD students that the “tribalism” revealed in the CRU emails has no place in science.
On the other hand, another very common reaction has been to mock the “deniers” for taking certain phrases out of context. This circle-the-wagons strategy tries to convince the public that the CRU episode has absolutely no bearing on the actual science, and that at worst it reveals petty personality flaws. This spin is epitomized in sarcastic pieces which take on the voice of the “deniers” and claim that the laws of physics are all a socialist hoax too.
These defenses are self-evidently absurd to anyone who has read the actual CRU emails in question. The public’s faith in the sacrosanct “peer-review process” will be understandably shaken when they read just how this “consensus” was enforced. Furthermore, the real debate was not between ultra-skeptics who say “global warming is a hoax” versus professional climate scientists who say “anthropogenic climate change is real.” [Read more →]
December 2, 2009 36 Comments
Last week I summarized the economics literature on the impact of climate change on human well-being. Or more accurately, Richard Tol reviewed the economics literature for the Spring 2009 issue of The Journal of Economic Perspectives. I simply told you about it and tossed in a few observations that I thought relevant.
In short, I reported that the peer-reviewed literature suggests that worries about some climate-induced Armageddon are probably misplaced. We will likely gain or lose a year of economic growth sometime in the latter half of this century from forecasted changes in the world’s physical climate. More than that cannot be said with much confidence.
Then, by coincidence, a study crosses my desk from the Institute for Policy Integrity at the NYU Law School. The study, titled “Economists and Climate Change; Consensus and Open Questions,” reports the findings of a survey of 289 of those economists the institute considers to be “the world’s top economists with expertise in climate change.” 144 of those individuals returned their questionnaire. Michael Livermore, the executive director of the institute, characterized the findings this way:
The finding that’s gotten the most attention is we asked the economists whether according to mainstream scientific views climate change posed a significant risk to the U.S. and global economies. And 84 percent of our respondents either agreed or strongly agreed with that statement, so that’s a fairly strong consensus viewpoint that climate change poses economic risks. That’s probably the single most attention grabbing one. We also polled on some of the specifics of legislation or policy. So for example, [Read more →]
November 17, 2009 4 Comments
Last week, at the first Senate Environment and Public Works Committee hearing on S. 1733, the Kerry-Boxer “Clean Energy Jobs and American Power Act,” Department of Energy Secretary Steven Chu explained the economic rationale for adopting a Kyoto-style cap-and-trade program.
His argument, in a nutshell, goes like this:
- Reducing emissions globally will require a massive investment in “clean technologies” — an estimated $2.1 trillion in wind turbines and $1.5 trillion in solar voltaic panels by 2030. These investments will create many green jobs.
- “The only question is — which countries will invent, manufacture, and export these clean technologies and which will become dependent on foreign products.”
- The United States is falling behind. “The world’s largest turbine manufacturing company is headquartered in Denmark. 99 percent of the batteries that power America’s hybrid cars are made in Japan. We manufactured more than 40 percent of the world’s solar cells as recently as the mid-1990s; today we produce just 7 percent.”
- To seize the opportunity of clean tech and keep from falling farther behind, “we must enact comprehensive climate legislation,” the most important element of which is a “cap on carbon emissions that ratchets down over time. That critical step will drive investment decisions towards clean energy.”
There is so much silliness packed into Chu’s testimony that it’s hard to know where to begin. [Read more →]
November 5, 2009 8 Comments
The slow moving Senate debate over climate change offers an opportunity to revisit the fundamentals of climate change. While the physical science about natural and anthropogenic forcings is the place to start, the economics of climate change is highly relevant for the policy debate. In this regard, a perfectly timed literature review in the Spring 2009 The Journal of Economic Perspectives is worth studying.
There have been 13 – count them, 13 – studies published in the peer reviewed literature that have wrestled with the economic implications of a doubling of atmospheric greenhouse gases (GhGs) on a CO2-equivalent basis. Those 13 studies have yielded 14 estimates of what will subsequently happen to global GDP. For those who are curious, 10 of those studies assume a subsequent warming of 2.5 C; two assume that a 1 C warming would follow; and two assume a 3 C warming would follow.
Here are the estimated changes to GDP relative to a baseline scenario where no CO2e buildup occurs: +2.5%, +2.3%, +0.9%, +0.1%, no change, -0.1%. -0.4%, -0.9% -1.3%, -1.4%, -1.5% -1.7% -1.9% and -4.8%. In short, climate change will either add or subtract about one year of economic growth from the global economy in the second half of this century. [Read more →]
November 4, 2009 6 Comments
One of the ugliest battles in the blogosphere climate wars has involved the newly released Superfreakonomics, sequel to the best-selling Freakonomics. In the new book’s final chapter (available here in pdf), economist Steven Levitt and journalist Stephen Dubner set out to challenge the view that massively restricting carbon emissions is the only hope for averting planetwide catastrophe.
In this post I will link to some of the major commentary on the book so far, and then focus on U.C. Berkeley economist Brad DeLong’s specific claims that Levitt and Dubner’s arguments in support of geoengineering are somehow “bad economics.” As we’ll see, Levitt and Dubner might be wrong, but if so they are wrong because of the numbers. DeLong is painting their views as self-evidently absurd, but that’s only because he himself is overlooking a basic economic point.
Not surprisingly, the climate scientists and economists who are most vocal about the need for drastic emissions cutbacks were furious when the book’s contents began circulating. Joe Romm got the ball rolling with this fiery post; his ally in such matters, Paul Krugman, soon followed suit. Dubner defended himself and co-author Levitt against Romm’s accusations of intentional distortion in this post, and one of the primary sources for the chapter, physicist (and all-around guru) Nathan Myhrvold, defended himself from Romm’s accusations of ignorance here.
In the present post, [Read more →]
October 29, 2009 1 Comment
Editor Note: Robert Murphy’s peer-reviewed article in The Independent Review, “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax”, is available online [.pdf].
When I first began working for the Institute for Energy Research, my preliminary research indicated that William Nordhaus (now a co-author of Paul Samuelson’s famous economics textbook) was a great representative of the mainstream case for a Pigovian carbon tax. I have gone on to study his case, presented in articles and a book, in great detail. What I have found is an eager willingness to spot “market failure” coupled with a naive faith in government “solutions.” The full article deals with these big picture issues, but this post will dwell on the narrow technical results–using Nordhaus’s own numbers–that should give average economists pause when it comes to the typical recommendation of a carbon tax to “internalize the externality” of greenhouse gas emissions.
Most Damages Come From Ill-Specified “Catastrophic” Outcomes. In Nordhaus’s DICE model [Dynamic Integrated Model of Climate and the Economy], he relies on a simplified model of the global climate system and economy, calibrated to the latest numbers put out by the IPCC and other groups. The model can then simulate the climate damage impacts of a marginal ton of emissions on human welfare, allowing Nordhaus to derive the “optimal carbon tax.”
When I delved into the numbers behind Nordhaus’s damage function–which related a given increase in global temperatures to a percentage loss of global GDP–I was quite surprised. The DICE model (at least as of the time I wrote the paper) assumed that a warming of 2.5C would yield a loss of 1.5% of global GDP, averaged across various sectors. For example, the agricultural sector (worldwide) would contribute to a 0.13% reduction in global GDP, the toll on coastal regions would yield another 0.32% of GDP in damages, and so forth.
The single biggest contributor, however, was a 1.02% GDP loss attributed to a “catastrophic impact.” (See Table 2 on page 209 of my paper, hyperlinked above.) So to repeat, Nordhaus’s optimal carbon tax was based on a damage function that said 2.5C of warming would yield 1.50% GDP losses, and 1.02% was due to a “catastrophic impact.”
Now this in itself is a bit disturbing, since the lion’s share of Nordaus’s recommended tax is coming from the nebulous “catastrophic impact” category. In other words, it would be one thing if careful, sectoral studies assessed the likely impact from various amounts of warming, and then Nordhaus rounded up the final number because of the “kicker” of ill-defined catastrophic impacts. But that’s not what happened–fully 68% of Nordhaus’s damage function (calibrated at the 2.5C warming level) results from this one category of impacts. [Read more →]
October 19, 2009 6 Comments
Paul Krugman has been on the warpath lately regarding climate change economics. He has devoted his last two NYT columns (here and here) to the subject, as well as back-to-back blog posts (here and here). True to form, Krugman accuses those who disagree with him of abject stupidity and evil intent; for Krugman it is impossible that any decent economist who cares about human beings could actually think the costs of cap-and-trade legislation will be high. But as we’ll see, Krugman’s own figures don’t jibe with the narrative he’s pushing.
In his September 27 blog post, Krugman takes up his familiar theme of denouncing those who dare to say that Waxman-Markey carries a large price tag. After using a diagram to explain the textbook distinction between the compliance costs of a new tax (or mandate), versus the “deadweight loss,” Krugman excoriates economist Martin Feldstein for allegedly spreading lies:
[Feldstein] took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation. But “compliance costs” are basically the sum of the blue rectangle and the red triangle; the true economic costs are just the triangle, and are much smaller.
OK now, this is quite simply hilarious, if you can follow me through the argument. I really don’t think Krugman realizes just how much his pants are down on this one.
First off, Krugman is correct that there really is a distinction between the impact of a new tax in terms of paying extra revenues, versus the overall loss to the economy because of distorted incentives. But when the public wants to know “how much will cap-and-trade cost?”, it is quite reasonable for them to wonder, “How much will my electricity bill, or gasoline prices, go up because of this?” Most people do not realize that Krugman & Co. are netting out the gains to the recipients of free allowances and government expenditures when computing the “net burden on U.S. households.”
For an analogy, consider the debate over health care reform. [Read more →]
October 2, 2009 8 Comments
Secretary Chu, Repeat After Me: “Consumers Respond to Price Signals, Not Moral Exhortations” (remember Jimmy Carter?)
Thirty years after President Carter declared that our energy crisis was the “moral equivalent of war,” forever known as “meow,” we are faced with another federal potentate who is sure that he knows what is best for us. At a Smart Grid conference in Washington, D.C., Energy Secretary Stephen Chu opined that “The American public … just like your teenage kids, aren’t acting in a way that they should act.”
Just as President Carter declared that our country’s failure to conserve natural gas and oil was a symptom of a “malaise,” not heaven forefend, the low prices for fuels sold at (federally) regulated prices, so does the current Energy Secretary believe that our citizenry is incapable of making rational decisions about energy use.
Why would the smartest guy in the room (read: central planner) say such a thing–a mistake his press office now says?
We consumers respond to economic incentives all the time. If the government offers an incentive to get rid of a car that was already paid for, then we will take the $4,500 and walk away with a new one; when the price of oil and gas rise people put on sweaters and turn down the thermostat, install new windows and think about shorter commutes to work; if the government encourages banks to lend money at very low rates to anyone with a pulse, then people will borrow money to purchase houses they cannot afford; if the government pays companies to generate electricity using wind then they will try to do so regardless of its specific utility in the energy mix. Incentives run the world of personal choices. People can only make rational decisions about the real alternatives that face them, not about some theoretical concerns far in the future.
Obviously, the Secretary thinks he was the only person to grow up in a household where dad told us to turn off lights, shut the refrigerator door, close windows in the winter and other staples of energy-conscious behavior. Only it was not really energy-conscious behavior that motivated dad, it was the gas and electric bills at the end of the month.
I’ve got news for you, Mr. Secretary, a lot of us grew up with this dad, made fun of him at the time for his “light bulb fetish,” and now tell our children exactly the same things (and don’t track mud on the floor, while you’re at it!). [Read more →]
September 25, 2009 3 Comments
In two previous posts, “Green” China and CO2 Cap-and-Trade Meets the (China) Dragon, I described China’s rising greenhouse gas (GHG) emissions as a “one-country negation” to the Waxman-Markey climate bill (HR 2454). “The expected growth of coal-fired generation in China over the next 20 years will result in a net increase in CO2 emissions from their power sector of more than ten times that of reduced U.S. emissions due to coal constraints,” I concluded.
This is good, not bad, insofar as dung and wood are terrible things to burn. Moreover, China has now committed to using better combustion technology in its power sector, including more coal gasification and high pressure (supercritical) coal-fired thermal power plants. To top things off, China has apparently committed itself to substantial growth in its renewable energy output by 2020.
This is generally to the good, and represents four key influences on Chinese energy and environment policies:
- The market – if you have to pay world prices for fuel you can no longer afford to waste it using poor technology;
- It is good diplomacy to be seen as “progressive” on the subject of climate change (and it takes trade sanctions off the table);
- There is probably a good market in all the Kyoto/Copenhagen adopter countries for lower cost (i.e., Chinese) solar, wind and CO2 capture technologies (why should “green tech” be any different from toys, clothes and electronics?); and
- The people of China – better coal combustion technology will improve air quality in China’s urban areas (that’s real pollution, the kind that politicians are rewarded for reducing).
In the end China’s output of greenhouse gases (GHG), mostly CO2, will continue to rise at a rate that is well above any decreases in the US or the EU. In fact, we looked at the actual output of CO2 from this aggressive plan and found that, even with complete adoption of high efficiency technology for all coal fired power plants completed after 2015, China’s increase in CO2 from power generation would be more than fifteen times the expected reduction in US CO2 output. [Read more →]
September 2, 2009 1 Comment