Category: Economics

Matters of money

Appetite for climate policy in Europe

In many ways, the European Union leads the world on climate change policy. In most states, there is broad political support for carbon regulation. They have also undertaken the largest experiment in carbon pricing. While the Emissions Trading Scheme (ETS) certainly has a large number of problems, it will hopefully develop towards greater effectiveness and prove a model for others. The EU also has some ambitious targets and, in many cases, reasonable mechanisms for working towards them.

Of course, it becomes more difficult to sell strong climate policies to voters when the economy heads south. Poland is suddenly extremely anxious about the carbon intensity of its coal-fired power plants, while other states are worried about the global competitiveness of their industries.

This is part of the reason for which it is so critical to get a strong new global agreement by the time of the Copenhagen meeting of the UNFCCC. Once emissions-intensive sectors are regulated in most of the states where they are important, states will be less anxious about losing competitiveness.

Carbon capture research

Researchers at the University of Calgary say they have a machine that can extract carbon dioxide from the air at a reasonable cost and using relatively little energy. From what I can tell, the CO2 extracted would still need to be buried somewhere. Even so, if such technologies prove cost effective and scalable, they could potentially play a role in stabilizing climate.

More details are in this PDF. Apparently, the tower can capture 15 tonnes per year of CO2 per square metre and each tonne of capture requires 81 kilowatt-hours of electricity (about $4 worth). Estimated total costs per tonne (including capital) range between $12.80 and $43.80.

The death of libertarianism

There is a lot about the political philosophy of libertarianism that is appealing. The idea that one should be free to behave as one wishes – as long as it doesn’t harm others – seems to provide a decent balance between allowing people to pursue their own purposes and stopping that pursuit from harming the general interest. That being said, the degree to which libertarianism can be liberating is diminishing with time. This is basically because of both the growing fact of interconnectedness and because of our growing awareness of it.

One example is economic globalization. At one point in time, it would have been considered reasonable to argue that economic activity on one side of the world has no morally relevant effect on the other. Now that markets are more linked, products and capital flow, and awareness of linkages exist, that becomes very difficult to argue. Before, it is as though the chooser was alone in a room with a light switch. It is of no particular moral consequence whether they choose to have it on or not. Now, it is more as though that light switch also reduces the function of the equipment in a hospital across town when it is pulled. Whereas libertarianism previously permitted free choice, the inter-linked example includes a moral obligation to act in a certain way.

Climate change may be the ultimate force diminishing how liberating libertarianism can be. Not only do nearly all of our life and economic choices impact innocent third parties around the world, they also contribute to a problem that will have a huge long-term impact on future generations and the natural world. Arguably, this makes the doctrine of “do what you like but do no harm” impossible to follow in practice.

It is not clear if or how the appealing aspects of libertarianism can be maintained in a world full of important material interconnections. The most plausible answer seems to be a combination of working hard to create situations where multiple moral choices actually do exist (light switches that don’t shut down breathing machines) and accepting those situations where the tradeoffs are real and making a determined effort to choose the least harmful option.

Building a low-carbon political consensus

In order to begin a sustained transition to a low-carbon global economy, the following things need to occur:

  • Political parties and the public at large must accept that stabilizing climate means eventually eliminating net emissions.
  • They must understand what the on-the-ground ramifications of this are.
  • A price for carbon must be established, with mechanisms for international trading.
  • Climate policies must become more rigorous over time, regardless of who is in power.
  • Climatic stability must become an axiom of all political ideologies accepted by parties likely to gain power in major emitting states.
  • Emissions reductions must take place both during times of strong economic growth and during times of economic difficulty.

Getting to that point, and doing so fast enough to prevent more than 2°C of mean temperature change, will be very challenging indeed – even if the actual sensitivity of the climate to greenhouse gasses is at the low end of the probable range.

It will probably require the rout of the small but highly effective climate change denial industry. In addition, it will require a jump in public imagination to being able to imagine an attractive low-carbon future. Either alternative or in addition, it will also required increased awareness of just how bad climate change could be. The Meteorological Office of the United Kingdom predicts that a business-as-usual course of emissions until 2050 would lead to 5.5°C to 7.1°C of temperature increase by 2100. For context, the IPCC projects that a temperature rise of 3.5°C to 7.1°C would place 48% to 100% of all species at risk of extinction. My guess is that the upper bound doesn’t include microorganisms, but it would still be pretty frightening if it only included multi-cellular beings. For the same temperature range, the predicted likelihood of “initiating irreversible melt of the Greenland ice sheet” is 85% to 100% and the “percentage of mortality in tolerant coral species” is 90% to 100%.

Here’s hoping that political consensus comes together soon… The frequent refrain of ‘balancing’ economic growth with environmental protection becomes insane when these kinds of ecological consequences are possible.

North/South historical versus future emissions

It is common to hear officials from developed states say things akin to this: “Yes, we are the ones who have historically done the most to create climate change – but we will be eclipsed by developing nations in the future.” While probably valid to some extent, there are many possible responses to this. There are arguments about who got rich how, as well as whose current per-capita emissions are high or low. What I am objecting to here is the curious methodology sometimes used to describe the developed/developing past/future dynamic.

Sometimes, states say both (a) developed states will continue to increase their emissions, in line with how they have been rising recently and (b) we will cut our emissions, according to our existing plan. If you step beyond that to compare your target future numbers with your business-as-usual projections for developing states, you make them look like a huge problem by comparison. One problem with this is that it is akin to saying the following: “I know I have been a problem gambler, but I have a plan to cut it down. I am going to halve my annual gambling losses in three years, and eliminate 80% of them in five. My buddy here, however, is a really compulsive gambler. He keeps losing more and more at an increasing rate. As such, his projected future losses are huge. Indeed, the amount I have lost so far is tiny compared to the amount he is going to lose in the future.” It is paradoxical because you are using the assertion that you will do better in the future to avoid present demands that you do more to reduce future emissions.

You are basically assuming that you can and will change, while others will not. No rich country government that has adopted targets for cutting emissions claims that cutting emissions requires cutting GDP. Nobody in power is touting a “stop climate change through recession” approach. As such, they must believe it possible to maintain economic growth while cutting emissions. While that may or may not be a valid assumption over various spans of time, it is an assumption that must be applied to developing states as well as developed ones.

In short, both developed and developing states need to cut emissions. The large probable future emissions from states like India and China are relevant to climate planning, partly insofar as concern about them could prompt useful transfers of wealth and low-carbon technology towards those states. At the same time, the wealth of the developed world – and the historical emissions that helped generate it – are also highly relevant. So too are the much larger non-climatic challenges being faced in the developing world. The developed world needs to start taking the kinds of steps necessary for actually hitting their 2020 and 2050 targets, in the process demonstrating to developing states how the transition can be accomplished in a politically acceptable way.

The frogs in the coal mine

A recent study conducted by the Zoological Society of London concluded that half of Europe’s amphibians could be extinct by 2050. There are two obvious ways to consider the news. Firstly, it is evidence of the enormously destructive effect human beings have on vulnerable ecosystems. Secondly, it raises questions about whether humanity itself will be able to survive the catastrophe is it creating. Amphibians have been around for 400 million years. While there have certainly been times in which a large proportion of them have died off, those times have been been listed among the catastrophic extinction events that have punctuated the history of life on Earth.

In short, the impact of the global economy is becoming comparable to that of major meteor strikes, mass volcanic events, large changes in sea level, and severe changes in atmospheric composition that have occurred in the past. For those who do not believe that humanity inhabits some special protected position in the cosmos, that seems like cause for very significant concern.

Keeping Our Cool: Canada in a Warming World

Canadian climatologist Andrew Weaver’s Keeping Our Cool provides an excellent and accessible introduction to climatic science. It also provides a great deal of useful information specific to Canada. As a result, if I had to recommend a single book to non-scientist Canadians seeking to understand the science of climate change, it would be this one. On the matter of what is to be done, the book is useful in a numerical sense but not particularly so in a policy sense. The discussion of economic instruments is superficial and the author basically assumes that a price of carbon plus new technology will address the problem.

The book covers climatic science on two levels: in terms of the contents themselves, such as you would find in textbooks and scientific papers, and in terms of the position of science within a broader societal debate. He accurately highlights the degree to which entrenched interests have seriously muddled the public debate, creating deep confusion about how certain we are about key aspects of how the climate works. Topics well covered by the book include electromagnetic radiation, time lags associated with climate change, the nature of radiative forcing, the nature and role of the IPCC, ocean acidification, the history of human emissions, the general history of the climate, climate modeling, aerosols, hurricanes, climate change impacts in general, permafrost, and the need for humanity to eventually become carbon neutral. One quibble has to do with the sequencing: while the narrative always flows well, the progression through climate science looks a bit convoluted in retrospect. That makes it a bit hard to find your way back to this or that piece of useful information. The book features some good numbers, graphs, and analysis that I have not seen elsewhere – such as a calculation of how much more carbon dioxide humanity can emit in total, given the desire to keep temperature change to less than 2°C above pre-industrial levels and various plausible values for climatic sensitivity. A second quibble is that the graphics are all black and white and printed at a fairly low quality. Sometimes, that makes them hard to interpret.

On the matter of international and intergenerational equity, Weaver comes to appropriate conclusions (that we should be concerned about future generations and that the rich states that caused the problem need to act first in solving it), but he fails to examine the ethical and policy issues in great depth. That is a minor failing, given the major purpose of the book, but it would probably leave someone who read only this book with a somewhat mistaken impression about the scale of changes being advocated and the ease with which they might be achieved. The book exaggerates the difference between a carbon tax and a cap-and-trade system with 100% auctioning, and doesn’t pay sufficient attention to areas in which regulation have the potential to be more effective than taxes (building codes, transport standards, etc).

In general, Weaver’s book is a strong and useful introduction to climatic science. When it comes to the big questions about climate ethics, and the policy and technological measures that will permit the emergence of a low-carbon society, other authors have done better.

Ethics embedded in economics

I recently attended a presentation on economic modeling, climate change, and the social cost of carbon. Initially, this was presented as a process where we took our best scientific information, fed it into our best economic models, and ended up with our best projections about how much harm climate change would do, and thus what the ‘social cost’ of carbon really is. The point I raised was that this approach is in no way divorced from ethical assumptions. Indeed, they are deeply ingrained in the economic models and have profound effects on how they turn out.

Here are a few of the most important aspects of that:

1) The discount rate: Nicholas Stern took a lot of flak for setting this value so low. Basically, it pertains to how much we value the welfare of future generations. The lower you set it, the more the welfare of future generations will affect your calculations. In financial planning, discount rates are often in the neighbourhood of 8%. That means we would be indifferent to having $X today or $X + 8% in one year. The trouble is, with a value that high the welfare of distant future generations becomes almost completely unimportant in your calculations. If we knew that climate change would instantly kill everyone alive in 100 years, using an 8% discount rate would make this fact largely unimportant in terms of working out what the ‘social cost’ of one tonne of carbon is today.

Of course, there are problems with using a very low discount rate as well. If we care as much about all future generations as about our own, we are compelled to put all of our wealth towards investments for them. After all, current spending only benefits us, whereas investment could increase the welfare of a potentially infinite chain of future generations.

In any case, the discount rate selected has a massive effect on what social price for carbon you end up with. Stern worked it out as about $85 per tonne. William Nordhaus, another economist, came up with a figure of $7, largely because he used a higher discount rate. This one choice has the power to massively affect any economic analysis of climate change.

2) The marginal utility of income Take $100 per year from Bill Gates and he will never notice. Take it from everyone living in Sub-Saharran Africa, and you would probably kill millions. Despite this, most economic models assume that a dollar is a dollar is a dollar. If melting permafrost makes us abandon a northern community, at a cost of $20 million, but the cost to Canadian industry of avoiding the emissions that caused it would have been $21 million, the economically optimal outcome would be to allow the community to be destroyed.

To some extent, this can be built into economic models. We can create a mathematical function for how useful each extra dollar a person gets is. If we use that ‘utility’ measure in place of a dollars measure, the impact of different choices on the least well off becomes more important. Actually doing so on climate change would almost certainly hugely increase the social cost of carbon, since the welfare of those threatened by sea level rise in Bangladesh and drought in Sudan would be considered on more equal terms to wealthy Floridians with property threatened by hurricanes and oil company employees hoping to exploit new fields in the Arctic.

In addition to having economic importance, this has massive ethical importance. An approach based on potential Pareto optimality supports any move that improves overall welfare. It doesn’t matter if the people gaining are residents of suburban Toronto while those losing live in villages in Ghana. In everyday life, we recognize that we cannot go around harming people just because we gain more from doing so than they lose.

3) Valuing catastrophic risks If we manage to turn the world’s carbon sinks into net sources, we will have created self-sustaining climate change. If that occurs at an accelerating rate, we will be facing runaway climate change, which threatens to cause enormous physical changes and mass extinctions – possibly including humanity itself. Integrating such possibilities into economic models requires a number of ethical assumptions. Even a very small possibility of such an outcome can have a giant influence on certain kinds of models; likewise, choosing to ignore such outcomes has highly ethically relevant effects.

In short, we cannot combine scientific and economic models and produce a technocratic answer about how much climate change should be permitted. We need to acknowledge and consider the ethical implications built into and arising from those models, we need to choose what kind of world we want to hand over to future generations, we need to consider how important we think responsibility for the problem is when allocating costs, we need to consider the special circumstances of the very poor, and we need to consider how big a risk of catastrophe we should really tolerate.

I think an honest examination of those issues, alongside the best climatic science we have, creates a powerful and immediate ethical and economic argument for change. It is virtually certain that – if they could speak to us – people fifty or one hundred years in the future would be screaming at us to do dramatically more than we are doing now.

Am I a ‘conservative?’

The other day, a friend of mine somewhat surprised me by referring to me as a ‘conservative.’ Pressed to define myself, I would say that I am a pragmatic libertarian who is willing to recognize that our freedoms need to be constrained in many ways in order to live decently together.

The Political Compass test categorizes me as follows: moderately left wing on economics (-3.00) and strongly slanted towards libertarianism rather than authoritarianism (-6.67).

I do object to some of the questions they pose. For instance:

  1. If economic globalisation is inevitable, it should primarily serve humanity rather than the interests of trans-national corporations – It is a bit silly to say that globalization serves one or the other, or that corporations are purely abstract entities whose welfare has nothing to do with individual people.
  2. The only social responsibility of a company should be to deliver a profit to its shareholders – This seems like an oversimplification of a complex question. Clearly, corporations have a general obligation to obey the law (though those in them may sometimes be morally obliged to break unjust laws). It certainly isn’t clear that the directors of corporations should undertake charity using shareholder wealth.
  3. First-generation immigrants can never be fully integrated within their new country – This clearly depends on what constitutes integration. For instance, when there are societies that have multiculturalism and inclusiveness as important features, people can be integrated without being assimilated.

The test also features a number of confusingly worded multiple-negative items. “Is X not true? No.” There are also a few questions seemingly designed to establish whether you are a racist. It seems to me that there have probably been racists of all possible political affiliations.

Personally, I would say my political philosophy is a combination of some classically liberal ways of viewing the world coupled with a libertarian concern for the individual and a utilitarian concern for group welfare. I would say that I am also unusually aware of the extent to which seemingly private decisions (what to eat, how to travel, etc) have significant and morally relevant impacts on other people.

May on the train

Kudos to Green Party leader Elizabeth May for using her campaign to draw attention to the unsustainable character of air travel. Rather than fly all over the country to court voters, she has opted for a far less carbon-intensive train based approach. One round-trip journey from Toronto to Vancouver emits about 1,700 kilos of carbon dioxide equivalent. A train journey emits about 730kg: about 60% less. That is not enough of a reduction for trail travel as presently undertaken to be genuinely sustainable, but it is a significant step in the right direction. People would also probably think more about long-distance transport if it took a few days rather than six or seven hours.

The linked CBC article does get one thing wrong, however. It says: “Other observers have pointed out it is probably cheaper than flying, too.” As discussed here before, taking the train seems to be more expensive. At present, a return ticket between Toronto and Vancouver is running for $1,390.20 plus taxes. WestJet provide the round-trip transport for $439.25 after taxes.