Economics – Page 128 – a sibilant intake of breath

Climate change and the Inuit way of life

At several points in the past, Arctic native groups including the Inuit have been effectively involved in the development of international regimes for environmental protection. Perhaps most significant was the role of the Inuit Circumpolar Conference in the development of the Stockholm Convention on Persistent Organic Pollutants (POPs). Studies done on the human health impact of Arctic POPs on the Inuit provided a big part of the scientific basis for the agreement. Arctic native groups were also effective at pressing their moral claim: chemicals being manufactured elsewhere were poisoning their environment and threatening their way of life.

A similar claim can be made about climate change, though the probable outcome is a lot more negative for Arctic native groups. Relatively few states and companies manufactured the bulk of POPs and, in most cases, less harmful chemicals can be used in their place. The economic costs of phasing out POPs were relatively modest. While the costs of dealing with climate change are a lot lower than the costs that will be incurred through inaction, they are nonetheless many orders of magnitude greater than the costs associated with abatement of POP use.

The threat posed to the Inuit by climate change is also quite a bit more far-reaching. It is entirely possible that the whole Arctic icecap will be gone within twenty years, or even sooner. 2007 was by far the worst year ever recorded for Arctic sea ice. Without summer sea ice, the Arctic ecosystem seems certain to change profoundly. Given the reliance of traditional Inuit lifestyles upon hunting terrestrial and marine mammals, it seems like such conditions would make it impossible to live as the Inuit have lived for millenia. This isn’t even a matter of worst-case scenarios. Even without significant new feedback effects, summer Arctic sea ice is likely to vanish by mid century. Increasing recognition of this partly explains the ongoing scramble to claim Arctic sub-sea mineral rights.

As with small island states, there doesn’t seem to be enormously much hope for avoiding fundamental and perhaps irreversible change in the Arctic.

Clean coal isn’t cheap

The point is increasingly well made by numerous sources: once you add carbon sequestration, coal is no longer an economically attractive option. In Indiana, a 630 megawatt coal plant is being built for $2 billion. That’s $3,174 per kilowatt. If we expect investors to seek a an 11% return on investment over a 20 year span, the capital cost of the plant is about 5.7 cents per kilowatt hour. On top of that, you need to pay for transmission, fuel, staff, and maintenance. On average, electricity in Indiana sells for about 6.79 cents per kilowatt hour.

The nominal price of the plant and the power it generates also doesn’t consider other coal externalities: like how mining it is dangerous and environmentally destructive. While this plant uses Integrated Gasification Combined Cycle technology and is capable of being attached to carbon sequestration infrastructure, it will not actually sequester the carbon it emits. As such, it will be only incrementally better than a standard coal plant with the same electrical output.

The only possible justification for this is that this is a demonstration plant that will help to make the technology much cheaper. Of course, when it is considered in that way, it seems at least equally sensible to spend $2 billion on experimental renewable power plants, in hopes of reducing their capital costs. The more you think about it, the more it seems like coal is densely packed carbon that is conveniently already in the ground. It should probably remain there.

Methane clathrates and runaway warming

Essentially a form of ice infused with methane, clathrates may seem an obscure topic for discussion. They exist only under extreme conditions: such as underneath oceanic sediment. What makes them significant is the sheer volume of methane they contain. While it is unclear what degree of warming would be required to induce methane release from clathrates, there is a very real possibility that such release could be self-reinforcing. Given the global warming potential of methane and the volume of the gas in oceanic clathrates, such a self-sustaining release could induce abrupt and massive climatic change.

As a greenhouse gas, methane is potent. Averaged across a 100 year span, one tonne of methane produces as much warming as 25 tonnes of carbon dioxide. Even worse, when atmospheric methane breaks down, it generally oxidizes into carbon dioxide and water. Taking into account secondary effects, the warming potential of a tonne of methane is about equal to 72 tonnes of CO2 (according to the Fourth assessment report of the IPCC). This is one reason people are so concerned about the climatic effects of meat production, as well as the reason for which methane capture projects are one of the more credible kinds of carbon offset.

Recent estimates hold that ocean clathrates contain 500-2500 gigatonnes of carbon dioxide equivalent: akin to 100-500 years worth of sustainable emissions. About 400 Gt of carbon dioxide equivalent is in the Arctic permafrost. If a substantial proportion of this methane were to be released, it would take the world into completely unknown climatic territory. As such, it is highly likely that the adaptive capacity of both humanity and existing ecosystems would be overwhelmed, perhaps to a degree akin to the Permian-Triassic extinction event. This is truly the nightmare scenario for climate change, though its probability cannot be accurately assessed in relation to any combination of human behaviours and natural variations.

The existence of such exceedingly dire possibilities affects economic calculations about climate change. While it may not be sensible to spend 20% of global GDP to avoid an outcome with a 0.1% chance of occurring, a strong argument can be made that heavy expenditure is justified in the face of catastrophic risk. It is not as though we have another planet to fall back on if this one gets rendered unfit for human habitation.

[Update: 4 February 2009] Here is a post on the danger of self-amplifying, runaway climate change: Is runaway climate change possible? Hansen’s take.

[Update: 19 February 2010] See also: The threat from methane in the North.

Four Economist articles on climate change

Sorry to post a bunch of links from one source, but this week’s Economist is unusually dense with worthwhile articles about climate change:

There is one on federal legislative efforts in the United States – focusing on the Lieberman Warner bill that has been dominating attention in the Senate. It isn’t as tough as a superior proposal from Bernie Sanders and Barbara Boxer, but it stands a better change of thrashing its way through committee and onto the Senate floor. Of course, even a bill that gets through the Senate would need to be made compatible with a bill passed by the House of Representatives and avoid being vetoed by the President. Even so, the kind of cap-and-trade bills that are appearing in the Senate may well be indicative of the kind of legislation to expect from the next American administration.

American states have traditionally been ‘policy laboratories’ and have often developed environmental policies that were later adopted federally. Examples include rules on automobile emissions and sulphur dioxide emissions which cause acid rain. A second article briefly discusses the Regional Greenhouse Gas Initiative (RGGI): one of the two most important regional initiatives in the US, along with the Western Climate Initiative. Again, this is more a sign of what may be to come than a hugely influential thing unto itself.

A less encouraging trend is demonstrated by an article on the increasing popularity of coal. What is especially distressing is that coal plants are even being built in Europe, which has gone further than anyone else in regulating carbon emissions. Clearly, prices are not yet high enough and regulatory certainty is not yet firm enough to effectively discourage the use of coal for electricity generation. The new plants aren’t even being built in a way that can be easily modified to incorporate carbon capture and storage.

One last story is more tangentially related to climate change: tomorrow’s federal election in Australia will partly turn on voters responses to the positions adopted on climate change by the Labor and Conservative candidates, respectively.

In general, I don’t think The Economist takes the problem of climate change seriously enough. They write good-sounding articles in situations where it is the focus, but often miss it completely or mention it only trivially in articles on energy trends, business, or economic growth. That said, their ever-increasing coverage of the issue is probably representative of its ever higher profile in the planning of the world’s most influential people.

Problems with carbon markets

A recent article in Scientific American makes a lot of good points about carbon markets and emission trading. Perhaps most important among them is the recognition that the simple existence of a market cannot ensure good environmental outcomes: there must be strong and appropriately designed institutions backing it up. Otherwise, well-connected firms will be able to wriggle through loopholes, fraud will occur at an unacceptable level, and cheating will be endemic.

The article points out some of the big failures in carbon markets so far. Within the European Union Emission Trading Scheme, far too many permits to emit were distributed for free. As a result, their price collapsed in April 2006. Even worse, coal companies in Germany and elsewhere were given free permits to pollute, able to sell some of those permits for cash, and willing to charge their customers for carbon costs that never existed. Also problematic has been the prominence of HFC-23 (trifluoromethane) projects within the Clean Development Mechanism of the Kyoto Protocol. Getting rid of HFC-23 entirely should have only cost about $136 million. It has an absurdly high global warming potential (12,000 times worse than CO2), and is easy to destroy and replace with less problematic chemicals. So far, firms have been able to earn $12.7 billion for partial elimination. The authors of the article suggest that simply paying for the $136 million worth of equipment would be far more sensible than allowing firms to exploit the price difference between the value of emission reduction credits and the cost of eliminating HFC-23.

Other problems with markets include the difficulty of working out what emissions would have been in the absence of some change (the approach used for many carbon offsetting systems) and the way markets can encourage incremental approaches to emission reduction rather than the fundamental overhaul of industrial sectors and energy infrastructures.

None of this is to say that markets are not important. Indeed, carbon pricing is an essential component in the fight against climate change. What it shows is that participants in markets cannot be implicitly trusted, and neither can the governments operating them. There must be mechanisms for oversight and enforcing compliance and a constant awareness about possibilities for cheating or gaming the system. Insofar as it has helped people to develop a better sense of these things, the Emission Trading System of the EU has been a valuable front-runner.

Discarded cod in Europe

Once again, there is a big stink in the media about cod. This time, it is prompted by a report that between 40 and 60% of the cod caught in the North Sea are caught inadvertently and must be discarded, dead, in order to comply with EU quotas. Apparently, 117 million of the 186 million fish caught in UK waters last year were thus discarded. Some people are calling for the quotas to be raised, so that fishers can keep the fish rather than discarding them. Of course, that would encourage more ‘accidental’ catches.

The real solution is to create and enforce a tax on by-catch. If killing a bunch of cod neither makes money for fishers nor costs them anything, they will essentially be indifferent to doing it. If they needed to pay for what they killed, they would be more careful about choosing where to fish and what sort of gear to use. Even fish that do not have commercial value in the way that cod do have ecological value as part of marine ecosystems. Killing them in unlimited numbers is not compatible with sustainability.

Producing sustainable fisheries requires limiting by-catch, which in turn requires effective measures. A by-catch tax could play such a role. Of course, the fishers would protest any such move, citing threats to their economic livelihood. In the end, however, natural resources, including fish, do not belong to whoever grabs them; they belong to everyone in trust. As a consequence, nobody has the right to loot or destroy a resource, even if the economics of their present way of life require it.

Trade and greenhouse gas emissions

Countries that are short on land and water import wheat from countries that have lots of both. In a way, you can see this as the small dry country ‘importing’ land and water in the conveniently transportable form of edible grains. The conveyance is an indirect one (you do not pay a ‘water surcharge’ on a bag of flour), but differences in relative factor prices can lead to opportunities for universal gains from trade.

Something similar happens with greenhouse gas emissions, though it takes the form of an externality rather than a priced component of a transaction. When manufacturing or primary commodities takes place in one state and the products of those industries are consumed in another, the total emissions in the exporting countries include some component for which the importing country arguably bears moral responsibility. When a Canadian buys an iPod made from Chinese energy and Sudanese oil, it seems fairest to say that the Canadian is responsible for the associated emissions.

A 2003 OECD study attempted to quantify such transfers using data from 1993 to 1998. For that span of time, the United States effectively imported an average of 263 megatonnes of carbon emissions per year: about 5% of their domestic total. China, by contrast, exported about 360 megatonnes: a figure equivalent to 12% of their GHG production. Canada, with all its forest and hydrocarbon industries, apparently exported about 54 megatonnes: about 11% of our emissions during that period.

Trying to calculate these on an ongoing basis and transfer responsibility from makers to buyers is simply impractical. Thankfully, the establishment of a global price for carbon would achieve the same effect without all the paperwork. It doesn’t matter if the tax is imposed at the point of production or the point of consumption. In the former case, producers would pass the cost to consumers anyhow.

Source: Ahmad, Nadim. “A Framework for Estimating Carbon Dioxide Emissions Embodied in International Trade of Goods.”

The Bottom Billion

Paul Collier‘s slim and informative volume is true to my recollection of the man from Oxford. The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It is engaging, concise, and powerfully argued. It is also unsparing in its criticism. Collier explains that the ‘developing world’ consists of two groups of states: those experiencing sustained growth and thus seeing their standard of living converging with those in the rich world and those that are ‘stuck’ in poverty, with stagnant growth or absolute decline.

Poverty traps

The ‘stuck’ states – where the world’s poorest billion inhabitants are concentrated – are trapped in one of four ways: by conflict, natural resources, being landlocked with bad neighbours, and by bad governance. States can be trapped in more than one simultaneously and, even when they escape, there are systemic reasons for which they are unusually likely to fall back into one. The discussion of the traps is particularly informative because of how quantitative methods have been used in support of anecdotal arguments.

Not only are ‘bottom billion’ states unusually likely to suffer from conflict, corruption, and similar problems, but some of the most important paths to growth used by states that have already escaped poverty are closed to them. To grow through the export of manufactured goods, you need both low wages and economies of scale. Even if wages in Ghana are lower than those in China, China has the infrastructure and the attention of investors. The presence of export-driven Asian economies makes it harder for ‘bottom billion’ states to get on a path to development.

Solutions

Collier’s proposed solutions include aid, military intervention, changes to domestic and international laws and norms, and changes to trade policy. Much of it is familiar to those who have followed development debates: the problems with agricultural tariffs, the way aid is often used to serve domestic interests rather than poverty reduction, corruption within extractive industries, and the like. His most interesting ideas are the five international ‘charters’ he proposes. These would establish norms of best practice in relation to natural resource revenues, democracy, budget transparency, postconflict situations, and investment. Examining them in detail exceeds what can be written here, but it is fair to say that his suggestions are novel and well argued. He also proposes that ‘bottom billion’ states should see import tariffs in rich states immediately removed for their benefit. This is meant to give them a chance of getting onto the path of manufacture-led growth, despite the current advantages of fast-growing Asian states. His idea that states that meet standards of transparency and democracy should be given international guarantees against being overthrown in coups is also a novel and interesting one.

Position in the development debate

Collier’s book is partly a response to Jeffrey Sachs’ much discussed The End of Poverty: Economic Possibilities for Our Time. Sachs pays much more attention to disease and has more faith in the power of foreign aid, but the two analyses are not really contradictory. Together, they help to define a debate that should be raging within the international development community.

Collier’s treatment is surprisingly comprehensive for such a modest volume, covering everything from coups to domestic capital flight in 200 pages. The approach taken is very quantitatively oriented, backing up assertions through the use of statistical methods that are described but not comprehensively laid out. Those wanting to really evaluate his methodology should read the papers cited in an appendix. Several are linked on his website.

Environmental issues

Environmental issues receive scant attention in this analysis. When mentioned, they are mostly derided as distractions from the real task of poverty reduction. It is fair enough to say that environmental sustainability is less of a priority than alleviating extreme poverty within these states. That said, the environment is one area where his assertion that the poverty in some parts of the world is not the product of the affluence in others is most dubious. It is likely to become even more so in the near future, not least because of water scarcity and climate change.

Climate change receives only a single, peripheral mention. This is probably appropriate. Surely, the effects of climate change will make it harder to escape the traps that Collier describes. That doesn’t really change his analysis of them or the validity of his prescriptions. The best bet for very poor states is to grow to the point where they have a greater capacity to adapt and will be less vulnerable to whatever the future will bring.

Shipping and invasive species

Globalization has been profoundly associated with massive sea freight shipments. Primary commodities flow from states with rich resource endowments to others with processing facilities. Labour intensive goods are shipped from where labour is cheap to where the goods are demanded. In the process of all this activity, a lot of oceanic species have been able to move into waters they would never otherwise have reached. This unintentional human-induced migration has occurred for two major reasons: the construction of canals and the transport of ballast water. This brief discussion will focus on the latter.

Each year, ships carry 3 – 5 billion tonnes of ballast water internationally. The water is taken on in port, once a ship has been loaded. This is necessary to make the ship balanced and stable at sea. The water taken on can easily include hundreds of marine species of which many of which are capable of surviving the journey. If they get expelled in a suitable environment, these creatures can alter ecosystems and crowd out local species. Sea urchins that have arrived in this way have been extinguishing kelp beds off the west coast of North America, destroying sea otter habitat in the process. Zebra mussels are another infamous example of a problematic invasive species.

Efforts to prevent the transmission of species through ballast water take a number of forms:

Ejecting the water taken on in port in the open ocean: most of the species expelled should die, and the new waters taken on should be relatively free of living things
Poisoning the creatures in the ballast water: this can be done with degradable biocides like peracetic acid and hydrogen peroxide
Transferring ballast water to a treatment facility at the arrival port
De-oxygenating the water in ballast tanks: this kills most species, if the deoxygenated conditions are maintained for long enough

None of these approaches is completely effective. Each retains some possibility of unintentionally introducing invasive species. Several also have other environmentally relevant effects.

That said, simply making an active effort to prevent species transmission between ecosystems marks a big change in human thinking. Not long ago, species were often introduced willy-nilly into entirely new environments: for aesthetic, practical, or whimsical reasons. Infamous cases include those of Eugene Schieffelin – the man who introduced starlings to North America because he wanted to continent to contain all the birds mentioned in the works of Shakespeare – and Thomas Austin – the British landowner who introduced rabbits to Australia because he missed hunting them. Wikipedia has a comprehensive list of such introduced species.

Solving climate change by stealth

There is a lot of talk about engaging people in the fight against climate change. In the spirit of prompting thought and discussion, I propose the opposite.

Rather than trying to raise awareness and encourage voluntary changes in behaviour we should simply build a society with stable greenhouse gas emissions and do so in a way that requires little input and effort from almost everyone.

Critically, that society should emerge and exist without the need for most people in it to think about climate change at all. For the most part, it should occur by means of changes that aren’t particularly noticed by those not paying attention. In places where change is noticed, it is because the legal and economic structure of society now requires people to behave differently, without ever asking them to consider more than their own short term interests.

To do this, you need to make two big changes: decarbonize our infrastructure and price carbon.

Decarbonizing infrastructure

When a person plugs their computer or television into the wall, they don’t care whether the power it is drawing came from a dam, from a wind turbine, or from a pulverized coal power plant. Changing the infrastructure changes the emissions without the need to change behaviour. Given how dismal people are at actually carrying out behavioural change (a scant few individuals aside), this is a good thing.

The change in infrastructure needs to go way beyond electrical generation. It must take into account the transportation sector and agriculture; it must alter our land and forest management practices. People can then broadly continue to do what they have been: eat meat, drive SUVs, etc, while producing far fewer emissions in the process. We shouldn’t underestimate the scale of the changes required. Moving from a high-carbon society to a low-carbon one is a Herculean task – especially if you are trying to do it in a way that does not produce major social disruption or highly intrusive changes in lifestyles.

Pricing carbon

There are some who would argue that putting a price on carbon is all your need to do, whether you use a carbon tax or a cap-and-trade system to achieve that aim. Set a high enough price for carbon and the market will change all the infrastructure for us. This is naive both in terms of economics and political science. No democratic government will introduce a carbon price draconian enough to quickly spur the required changes in infrastructure. Governments copy one another and follow the thinking of voters: if other countries are investing in ethanol and voters think it is green, governments will often pile onto the bandwagon, almost regardless of ecological merit. In economic terms, carbon pricing is inadequate because it lacks certainty across time. If one government puts in a $150 per tonne tax, industry may reason that it will be overturned by popular outrage in a short span of time; infrastructure investments will not change.

What pricing does, in combination with infrastructure change, is eliminates the kind of activities that just cannot continue, even when everything that can be decarbonized has been. The biggest example is probably air travel as we know it. There is no way we can change infrastructure and keep people jetting off to sunny Tahiti. As such, pricing will need to make air travel very rare – at least until somebody comes up with a way to do it in a carbon neutral way.

Advantages and issues

The general advantages of this approach are that it relies on people making individual selfish decisions at the margin, rather than trying to make them into altruists through moral suasion. The former is a successful strategy – consider macroeconomic management by central banks or the criminal justice system – the latter is not. People will use emissions-free electricity because it will be what’s available. They will run their cars on emission-free fuels for the same reason. Where emissions cannot be prevented, they will be buried.

The disadvantages of this approach are on two tracks. In the first place, it might be impossible to achieve. There may never be an appropriate combination of power, technical expertise, and will. Without those elements, the infrastructure will not change and carbon will remain an externality. It is also possible that decarbonizing a society like ours is simply technologically impossible. Carbon sequestration may not work, and other zero-emission and low-emission technologies may turn out to be duds. In that case, major lifestyle changes would be required to stabilize greenhouse gas concentrations.

In the second place, this approach is profoundly elitist and technocratic. It treats most citizens as machines that respond to concrete personal incentives rather than their moral reasoning. Unfortunately, ever-increasing emissions in the face of ever-increasing scientific certainty suggests that the former is a better description than the latter, where climate change is concerned.