Economics – Page 114 – a sibilant intake of breath

Oil producers and game theory

We usually think about oil prices from the perspective of consumers, but it can also be useful to think about the incentives faced by producing countries. A country like Kuwait has a fixed amount of total oil, and a level of recoverable oil that varies depending on price and technology. Oil is the most lucrative product the state can provide on a global level. There are thus serious concerns about what would happen if production began to decline terminally.

Expectations are also critical. If I expect oil prices to keep rising, it may make sense for me to pump less. After all, I can earn more per barrel for it later. All the oil that got pumped at $10 a barrel a few years ago could have contributed a lot more to consumption and investment at today’s prices. Conversely, if I expect this to be a short-term shock, my interest is to pump as much as I can and sell it for sky-high prices.

Producer incentives thus create both a positive and a negative feedback. In situations where oil is running short (and producers know it), the incentive is to cut supply even further to take advantage of higher future prices. In situations where producers consider present prices to be an aberration, the incentive is to glut the market and thus depress prices even more when they do start to fall.

Of course, the oil supplying states are probably just as concerned with keeping their real reserves and production potential secret from one another as they are concerned about hiding it from consumer states. As such, states like Russia and Saudi Arabia that might be lying publicly about their reserves cannot be entirely certain whether other parties are lying as well, and to what extent.

iTunes movie rentals

Last night, Emily and I tried renting a film through iTunes. I think it’s fair to say that this is another media technology that Apple got right. There are endless problems with systems that promise to let you buy films in the form of downloads. There are limitations on usage, and no guarantees that you can use them on future devices. Renting is quite different. Apple offers a service akin to that of a video store for a comparable price and without the bother of picking up and returning discs. With a bit of equally convenient competition, costs may even fall further.

Indeed, it seems pretty fair to predict that video shops have no future among those customers with computers and broadband access. Eventually, web based services will offer far more films at similar quality and far greater convenience.

Personally, I am rather looking forward to the day when it will be possible to spend $4-5 for two days worth of access to most any film ever made.

Rethinking development

When discussing global solutions to climate change, a constant distinction is drawn between three groups of states (two of which we sometimes pretend are the same). There are the ‘developed’ states and a ‘developing’ set which consists of those that are growing rapidly (India, China, Brazil, Russia) and those that are stagnant or even getting poorer (Zimbabwe, Sudan).

An alternative way of thinking about the situation is this. Imagine the states as human beings. The ‘developed’ ones grew up in the very unusual situation of huge amounts of cheap, easy energy everywhere. (Sci-fi nerds might appreciate how they could be equated to Guild Navigators.) As a consequence, they developed in a deformed way. Their economies can only keep going in their present form while that unusual situation continues. The rapidly developing states are following the same line of development, despite the certainty of climate change and the probability of energy prices rising in the long term.

The ‘developed’ states may be all grown up, but they have developed into monsters. ‘Developing’ states may want to muster the determination to mature more gracefully.

Fixing Climate

Written by Wallace Broecker and Robert Kunzig, Fixing Climate: What Past Climate Changes Reveal about the Current Threat – And How to Counter It combines relatively conventional thinking about the nature and consequences of climate change with a rather unusual solution. It is rich in personal anecdotes, but feels a bit as though it lacks overall rigour.

Climatic history

Much like Richard Alley’s Two Mile Time Machine, this book discusses how various types of natural record can inform scientists about the past state of the climate. These include core samples of ice, mud, and sediment. They also include fossils, living trees, and much else.

This book tells a number of interesting stories about how some of this data has been collected and analyzed, as well as about the personalities of those who did the work. It highlights those areas in which there is a good level of understanding, those where there are competing theories, and those where present theories have not yet proved adequate for explanation.

The two big points made are that climate is unstable and sometimes prone to big abrupt shifts and that human emissions of greenhouse gasses (GHG) are ‘poking the ill-tempered beast with a sharp stick.’

Likely consequences

Broecker’s book claims that the two most plausible threats from climate change are sea level rise – from melting ice in Greenland and West Antarctica – and droughts induced by changes in wind patters and precipitation. It also mentions the possibility of a thermohaline circulation collapse.

The book does not contemplate truly catastrophic runaway climate change scenarios, in which the full potential of burning tropical forests and melting permafrost is brought to bear. Instead, it restrains itself to the possibility of a 14 metre sea level rise – possibly over centuries – and the emergence of very profound droughts in some areas that extend for hundreds of years.

The book highlights how there are big uncertainties about the timing of changes, but asserts strongly that prompt and extensive mitigation action is required.

What is to be done?

Where Monbiot and Romm have detailed plans for emission reductions through different wedges, Broecker asserts that the best mechanism for dealing with rising atmospheric GHG concentrations is to do as follows:

Use a huge number of machines to absorb carbon dioxide (CO2) directly from the air.
Store it temporarily in a chemical compound.
Separate the compound from the CO2, recycling the former for re-use in the machines.
Bury the CO2. This can be done in the deep ocean (delaying emissions from right now until later, ‘shaving the peak’ of the concentration rise), in old oil and gas fields, or in saline aquifers.

At the same time:

Dig up enormous quantities of carbon absorbing ultramafic rock.
Grind these to fine powder.
Let them absorb atmospheric CO2
Dump the carbon-bonded rock somewhere

At the same time, emissions from fixed sources like power plants should be captured and stored. With this combination of activities, the authors assert, we could reduce the global concentration of GHGs to whatever level we prefer.

This scheme strikes me as very impractical. Every chemical step can be accomplished, but the matters of scale and energy make me doubt whether this could ever be used on a global level. Broecker assumes that our total emissions will continue to grow, from the present level of about 29 gigatonnes. The sustainable level is about 5 gigatonnes, so we would need to deploy an enormous array of capture stations, provide them with carbon-absorbing chemicals, process those chemicals once they are exposed, return them to the machines, and bury the CO2. Even if it would be technically possible to do all this, it is not at all clear that doing so would be cheaper or easier than cutting down on total energy usage, while also investing in the development and deployment of renewable power.

Even if climate change could be addressed, a society built on fossil fuels cannot last. The scheme basically assumes unlimited access to hydrocarbon energy, combined with very limited potential for renewables. To explain why, think about the energy chains involved. Broecker repeatedly asserts that it will take only a fraction of the energy from a set quantity of hydrocarbons to absorb and sequester the resultant GHGs. He basically assumes that we will have cheap coal at least for the foreseeable future. There is reason to doubt this. While we will not exhaust oil, gas, or coal by the end of the century, we may approach or pass the point where it takes as much energy to extract and process as it contains. In that case, we would need renewables regardless of whether we had capture capabilities or not.

In the end, the book is a relatively interesting one. If you want detailed information on paleoclimatology, Alley’s book is probably a better choice. If you are looking for relatively practical solutions to the climate change problem, Romm and Monbiot are probably better bets. That being said, reading this book will definitely inject a few new ideas into your thinking about climate, climate science, and how humanity is to respond. It is also worth noting that it is possible that capturing CO2 straight from the air will prove viable in terms of energy and economics. If so, we should see firms starting to do it pretty soon after a decent carbon price is imposed in developed states.

A bad new copyright bill

Canada’s proposed new copyright act is unacceptably poor, most importantly because of its treatment of Digital Rights Management (DRM). Under the new law, circumventing any such system – no matter why – is against the law. This means that if the company that sold you a song decides to stop letting you access it, you are out of luck. Under the new law, it would be a crime to copy music from a DRM-protected CD that you bought to an iPod that you own, with an associated fine of $20,000.

The law would also mean that organizations like libraries cannot have any confidence in their future ability to use digital materials today and people with disabilities will not be able to use technology to make protected works more accessible. It would make it a crime for me to use VideoLAN player to watch DVDs I bought in Europe, just because people selling DVDs have decided to use monopolistic regional codes to boost profits. Indeed, it would criminalize the distribution of VideoLAN itself.

It must be remembered that the purpose of copyright law is to serve the public good, not copyright holders. We allow copyrights because they create a legal environment in which it is possible to profit from a good idea. As a result, copyright protections help to ensure that people are furnished with new and high quality music, books, etc. By failing to protect the legitimate needs of consumers, this bill fails to enhance the public interest. As such, it deserves to be opposed and defeated.

Cap and dividend

One intriguing form of carbon pricing that is being bandied about is the ‘tax and dividend’ approach. The idea is this: everybody pays a carbon tax on fuels and emitting activities. All the money is collected in a fund and redistributed evenly back to all taxpayers. As such, anyone who buys emits more than the mean quantity of carbon becomes a net payer and everyone who emits less actually gets back more than they pay. As mean emissions fall, so does the equivalence level of emissions – the point where you get back exactly what you paid.

For example, let’s imagine a tax that starts at a relatively modest $20 per tonne of carbon dioxide equivalent (CO2e). The mean Canadian produces about 23 tonnes of carbon a year, meaning they would pay $460 in carbon tax that year. That being said, the mean Canadian would also get back $460 as a dividend. A Canadian who is really trying (not flying, not eating meat, living in an efficient home, not driving, etc) might have much more modest emissions: say, 6 tonnes a year. They would pay $120 in carbon taxes and get back $460 – a nice ‘thank you’ for living a life that does less harm to others. Of course, someone who flies trans-Atlantically several times a year might end up paying significantly more in tax than they get back as a dividend.

Now say it is ten years on. The price of carbon has risen to $50 per tonne of CO2e and mean emissions per person have fallen by 25%. The break-even point is now 17.25 tonnes of carbon. As a result, someone who has not changed their lifestyle is now paying (23 – 17.25) * $50 or $287.50 a year in carbon taxes. If the 6 tonne person also managed a 25% cut, they would be earning (17.25 – 4.5) * $50 or $637.50 more in dividends than they paid in taxes.

These numbers are purely illustrative. It is possible that the per-tonne carbon taxes could be lower, and also possible that they would need to be much higher. In whatever case, the structure of the approach should be clear.

The approach has much to recommend it. For one, it is likely to enjoy the support of those already living relatively green lifestyles. For another, it has similar incentive effects to other carbon pricing schemes. It would encourage people to minimize or forego things with a heavy carbon burden, as well as make them more willing to invest in capital and technology that will reduce their carbon footprint.

Oil versus labour

Thought of the day:

One barrel of oil contains about 5.8 million British thermal units (BTUs) of energy (1700 kilowatt-hours). That is roughly equivalent to the energy output of an adult human working 12.5 years worth of 40 hour weeks.

At present, the world uses about 31 billion barrels of oil a year. That is equivalent to the global population (6.7 billion people) working for 58 years.

While the theoretical capacity of renewables is even higher, it is a fair bet that they will take a lot more effort to harness. There aren’t many places where solar panels will spurt out of holes you make in the ground.

Oil’s next century

With oil prices at levels rivaling those during the crises of the 1970s, virtually everyone is clamouring for predictions about medium and long-term prices. Those concerned about climate change are also very actively wondering what effect higher hydrocarbon prices will have.

In order to know what the future of oil looks like, answers are required to a number of questions:

How will the supply of oil change during the decades ahead? How many new reserves will be found, where, and with what price of extraction? How much can Saudi Arabia and Russia expand production? When will their output peak?
How will the demand for oil change? How much and how quickly will high prices depress demand in developed states? What about fast growing developing states like India and China?
At what rate, and what cost, will oil alternatives emerge. Will anyone work out how to produce cellulosic ethanol? Will the development of oil sands and/or oil shale continue apace?
What geopolitical consequences will prices have? If prices are very high, will that prove destabilizing within or between states?
Will the emerging alternatives to oil be carbon intensive (oil sands, corn ethanol) or relatively green (cellulosic ethanol, biomass to liquids)?

Of course, nobody knows the answer to any of this with certainty. There are ideological optimists who assert that humanity will respond to incentives, innovate, and prosper. There are those who allege that oil production is bound to crash, and that civilization as we know it is likely to crash as well.

Mindful of the dangers of prediction, I will hold off on expressing an opinion of my own right now. The magnitude of the questions is far too great to permit solution by one limited mind. What contemplating the variables does allow is an appreciation for the vastness and importance of the issue. Virtually any combination of answers to the questions above will bring new complications to world history.

Capturing waste heat

Comment threads on this blog have previously been rife with discussion about boosting the efficiency of industrial processes through the use of waste heat. It does seem intuitively undesirable to have something like a nuclear power plant venting a significant portion of the total energy being expended from fission in the form of hot air or water being dumped out into the natural environment.

A machine installed at Southern Methodist University demonstrates that there are situations where waste heat can produce a decent amount of electricity (50 kilowatts) at an acceptable cost, and with a payback period of just three or four years. The machine uses an Organic Rankine Cycle, in which a high molecular mass organic fluid is used to convey the waste heat. This is necessary to produce useful work, and eventually electricity, from relatively low temperature sources. As energy prices continue to rise, you can expect to see more such equipment being developed and deployed.

Almost nothing is sustainable

Sustainable development’ is an expression that you hear a great deal. It was famously defined by the Brundtland Commission as meeting the needs of the current generation without sacrificing the ability of future generations to meet their own needs. This seems sensible enough, but it raises two major questions: how do we identify the ‘needs’ of this generation, and how do we anticipate the capabilities of future ones.

Most talk of sustainability these days is nonsense. The simple reason for that is that very little of what we do is sustainable. Nothing dependent upon fossil fuels is sustainable, so there go most of our forms of transportation, a lot of our electrical generation, and most of global agriculture. Nothing that destroys the long-term productivity of agricultural land is sustainable, but much of our agriculture does just that. Continually requiring more fertilizers to cope with loss of soil nutrients is not sustainable. Virtually no fisheries anywhere in the world are used in a sustainable way (none when you consider the impact climate change will have on them). Finally, nothing that contributes to accelerating climate change is sustainable; that doesn’t really create sharp categories between what is or is not sustainable. Rather, it gives an idea about the total intensity of all the greenhouse gas emitting things we undertake must be.

What does this generation need?

The matter of defining the ‘needs’ of the current generation is enormous and partially irresolvable. At one absurd extreme is the flawed idea that people have the right to continue living as they always have. Asserting this is akin to a French aristocrat facing the guillotine, arguing that his life of privilege so far justifies more privilege in the future. We cannot have a right to something that demands unacceptable sacrifices from others – particularly when that right hasn’t been earned in any meaningful way. At the other extreme is the assertion that nobody has any right to material things and that people starving around the world and dying from treatable, preventable diseases have no credible moral claim to additional resources. Somewhere between the two lies the truth. The important thing isn’t to work out precisely where, but to generate a universal understanding that constraint is going to need to be a part of human life, if we are to survive in the long term.

Arguably, ‘needs’ are entirely the wrong way to think about things. Instead of starting with who we are and what we want, perhaps we should start with what there is and what impact that has on how we can live, where we can be, and how many of us there can be at any one time.

How capable will future generations be?

The matter of the capabilities of those in the future is similarly challenging. Our expectations about the future produce a ‘treadmill’ effect, where we expect added financial wealth and improved technology to make future generations better off despite how more resources have been depleted, more climatic damage done, and more pollutants released into the environment. If people in the future are super-resourceful technological wizards, the degree of restraint we need to observe in order to accommodate them is small. No wonder this belief is so popular among those seeking to defend the status quo.

Of course, it is possible that future generations will have less capability to satisfy their needs than we do. Most obviously, this could be because of the depletion of fossil fuels (a vast and easily accessed form of energy) or because of the impacts of climate change. To some extent, we need to take such risks into consideration when we are deciding what duties we owe to future generations. Any such consideration will require passing along more resilience, in the form of more resources and a healthier planet.

What might sustainability look like?

Quite possibly, the only people in the world living sustainably are those in small agricultural communities with little or no connection to the outside world. Since they do not import energy, they must be sustainable users of it. Even such communities, however, need not necessarily be sustainable. Unless they have a low enough population density to keep their food production from slowly degrading the land, they too are living on borrowed time.

Producing a sustainable global system probably requires all or most of the following:

The stabilization of global population, perhaps at a level significantly below that of today.
The exclusive use of renewable sources of energy, derived using equipment produced in sustainable ways.
Agriculture without fossil fuels, and with soil and crop management sufficient to make it repeatable indefinitely.
Sustainable transport of old (sailing ships) and new (solar-electric ground vehicles) kinds.
The preservation of ecosystems that provide critical services: for instance, tropical forests that regulate climate.
An end to anthropogenic climate change.

While it is technically possible that we could manage to build problems and solve them through clever technology indefinitely, it does seem as though doing so is risky and probably unethical. It may be more prudent to begin the transition towards a world unendingly capable of providing what we desire from it.