Economics – Page 130 – a sibilant intake of breath

A banking analogy for climate

[Update: 22 January 2009] Some of the information in the post below is inaccurate. Namely, it implies that some level of continuous emissions is compatible with climate stabilization. In fact, stabilizing climate required humanity to have zero net emissions in the long term. For more about this, see this post.

Every day, new announcements are made about possible emission pathways (X% reduction below year A levels by year B, and so forth). A reasonable number of people, however, seem to be confused about the relationship between emissions, greenhouse gas concentrations, and climatic change. While describing the whole system would require a huge amount of writing, there is a metaphor that seems to help clarify things a bit.

Earth’s carbon bank account

Imagine the atmosphere is a bank account, denominated in megatonnes (Mt) of carbon dioxide equivalent. I realize things are already a bit tricky, but bear with me. A megatonne is just a million tonnes, or a billion kilograms. Carbon dioxide equivalent is a way of recognizing that gasses produce different degrees of warming (by affecting how much energy from the sun is radiated by the Earth back into space). You can think of this as being like different currencies. Methane produces more warming, so it is like British Pounds compared to American dollars. CO2 equivalent is basically akin to expressing the values in the ‘currencies’ of different gasses in the form of the most important one, CO2.

Clearly, this is a bank account where more is not always better. With no greenhouse gasses (GHGs), the Earth would be far too cold to support life. Too many and all the ice melts, the forests burn, and things change profoundly. The present configuration of life on Earth depends upon the absence of radical changes in things like temperature, precipitation, air and water currents, and other climatic factors.

Assuming we want to keep the balance of the account more or less where it has been for the history of human civilization, we need to bring deposits into the account in line with withdrawals. Withdrawals occur when natural systems remove GHGs from the atmosphere. For instance, growing forests convert CO2 to wood, while single celled sea creatures turn it into pellets that sink to the bottom of the ocean. One estimate for the total amount of carbon absorbed each year by natural systems is 5,000 Mt. This is the figure cited in the Stern Review. For comparison’s sake, Canadian emissions are about 750 Mt.

Biology and physics therefore ‘set the budget’ for us. If we want a stable bank balance, all of humanity can collectively deposit 5,000 Mt a year. This implies very deep cuts. How those are split up is an important ethical, political, and economic concern. Right now, Canada represents about 2% of global emissions. If we imagine a world that has reached stabilization, one possible allotment for Canada is 2%. That is much higher than a per-capita division would produce, but it would still require us to cut our present emissions by 83%. If we only got our per-capita share (based on present Canadian and world populations), our allotment would be 24.5 Mt, about 3.2% of what we currently emit. Based on estimated Canadian and world populations in 2100, our share would be 15 Mt, or about 2% of present emissions.

Note: cutting emissions to these levels only achieves stabilization. The balance in the bank no longer changes year to year. What that balance is depends upon what happened in the years between the initial divergence between deposits and withdrawals and the time when that balance is restored. If we spend 100 years making big deposits, we are going to have a very hefty balance by the time that balance has stabilized.

Maintaining a balance similar to the one that has existed throughout the rise of human civilization seems prudent. Shifting to a balance far in excess carries with it considerable risks of massive global change, on the scale of ice ages and ice-free periods of baking heat.

On variable withdrawals

Remember the 5,000 Mt figure? That is based on the level of biological GHG withdrawal activity going on now. It is quite possible that climate change will alter the figure. For example, more CO2 in the air could make plants grow faster, increasing the amount withdrawn from the atmosphere each year. In the alternative, it is possible that a hotter world would make forests dry out, grow more slowly, and burn more. However the global rate of withdrawal changed, our rate of deposit would have to change, as well, to maintain a stable atmospheric balance.

Here’s the nightmare possibility: instead of absorbing carbon, a world full of burning forests and melting permafrost starts to release it. Now, even cutting our emissions to zero will not stop the global atmospheric balance from rising. It would be akin to being in a speeding car with no control of the steering, acceleration, or brakes. We would just carry on forward until whatever terrain in front of us stopped the motion. This could lead to a planetary equilibrium dramatically unlike anything human beings have ever inhabited. There is a reasonable chance that such runaway climate change would make civilization based on mass agriculture impossible.

An important caveat

In the above discussion, greenhouse gasses were the focus. They are actually only indirectly involved in changes in global temperature. What is really critical is the planetary energy balance. This is, quite simply, the difference between the amount of energy that the Earth absorbs (almost exclusively from the sun) and the amount the Earth emits back into space.

Greenhouse gasses alter this balance because they stop some of the radiation that hits the Earth from reflecting back into space. The more of them around, the less energy the Earth radiates, and the hotter it becomes.

They are not, however, the only factor. Other important aspects include surface albedo, which is basically a measure of how shiny the planet is. Big bright ice-fields reflect lots of energy back into space; water and dark stone reflect much less. When ice melts, as it does in response to rising global temperatures, this induces further warming. This is one example of a climatic feedback, as are the vegetation dynamics mentioned previously.

In the long run, factors other than greenhouse gasses that affect the energy balance certainly need to be considered. In the near term, as well demonstrated in the various reports of the IPCC, it is changes in atmospheric concentration that are the primary factor driving changes in the energy balance. Things that alter the Earth’s energy balance are said to have a radiative forcing effect. (See page 4 of the Summary or Policy Makers of the 4th Working Group I report of the IPCC.)

What does it mean?

To get a stable atmospheric balance, we need to cut emissions (deposits) until they match withdrawals (what the planet absorbs). To keep our balance from getting much higher than it has ever been before, we need to do this relatively quickly, and on the basis of a coordinated global effort.

Liability and computer security

One of the major points of intersection between law and economics is liability. By setting the rules about who can sue brake manufacturers, in what circumstances, and to what extent, lawmakers help to set the incentives for quality control within that industry. By establishing what constitutes negligence in different areas, the law tries to balance efficiency (encouraging cost-effective mitigation on the part of whoever can do it most cheaply) with equity.

I wonder whether this could be used, to some extent, to combat the botnets that have helped to make the internet such a dangerous place. In brief, a botnet consists of ordinary computers that have been taken over by a virus. While they don’t seem to have been altered, from the perspective of users, they can be maliciously employed by remote control to send spam, attack websites, carry out illegal transactions, and so forth. There are millions of such computers, largely because so many unprotected PCs with incautious and ignorant users are connected constantly to broadband connections.

As it stands, there is some chance that an individual computer owner will face legal consequences if their machine is used maliciously in this way. What would be a lot more efficient would be to pass part of the responsibility to internet service providers. That is to say, Internet Service Providers (ISPs) whose networks transmit spam or viruses outwards could be sued by those harmed as a result. These firms have the staff, expertise, and network control. Given the right incentives, they could require users to use up-to-date antivirus software that they would provide. They could also screen incoming and outgoing network traffic for viruses and botnet control signals. They could, in short, become more like the IT department at an office. ISPs with such obligations would then lean on the makers of software and operating systems, forcing them to build more secure products.

As Bruce Schneier has repeatedly argued, hoping to educate users as a means of creating overall security is probably doomed. People don’t have the interest or the incentives to learn and the technology and threats change to quickly. To do a better job of combating them, our strategies should change as well.

Types of goods

In economic theory, most things you can buy are ‘normal goods.’ This means that, as the price rises, people buy less of them. Conversely, people buy more as the price falls. This is all quite self-explanatory but it is interesting to note that there are other types of goods that operate in different ways.

The most common example may be inferior goods. The richer people get, the less they spend on inferior goods. This includes most kinds of discount items: once people can afford something better, they make the switch. Inferior goods reflect this property both at the micro level (an individual gets a big raise and buys less cheap IKEA furniture) and at a macro level (the mean income in a state rises and demand for low-cost gruel falls). Long distance bus trips are a classic example of an inferior good, as anyone who has spent more than twelve hours in a smelly, noisy coach can easily understand.

A somewhat perverse counterpoint to inferior goods can be found in Veblen goods. Named after the economist Thorstein Veblen, these are products for which the demand actually rises as the price does. This is essentially on account of their exclusivity. People buy Velben goods (such as Rolls Royce cars and $50,000 cell phones) precisely to demonstrate that they can. Of course, this makes them a godsend for those hoping to part status conscious rich suckers from some of their wealth.

A final possibility, which may not actually exist, is a Giffen good. To qualify, the good needs to be inferior (in the sense described above), there must be a lack of close substitutes, and the good must comprise a significant share of the purchaser’s budget. With these goods, price rises also lead to people buying more, though for a rather different reason. People who have become too poor to buy a better option fall back on a worse option. The failure of economists to find any well-defended empirical examples suggests that this kind of good may exist only in the minds of academics.

Both Giffen goods and Veblen goods exist because of possible characteristics of the buyer, rather than of the good itself. Whereas Giffen goods are easy to reconcile with ‘rationality’ as understood by economists, Velben goods do so only when they are viewed as inputs in the manufacture of the commodity actually sought: such as social status or prestige.

People wanting to read even more about goods and economic theory can look into the distinction between rivalrous and non-rivalrous goods and excludable and non-excludable goods. The two ideas together define public goods and common property goods, the existence of which make even the most hard-nosed economist recognize the efficiency of governmental action to regulate markets.

Not so jolly: the economics of gift giving

As anyone who has ever been disappointed by what they found under the wrapping paper knows, gift-giving can lead to the misallocation of resources. Gift givers misanticipate the value a particular thing will have for the recipient, and thus devote more resources to the purchase than the recipient would. Joel Waldfogel, writing in The American Economic Review back in 1993 discussed this and other related economic issues in a notorious article called “The Deadweight Loss of Christmas.” (Available through JSTOR and Google Scholar)

Imperfect knowledge and non-ideal choices

The paper includes the gloomy conclusion that “gift giving destroys between 10 percent and a third of the value of gifts.” On this basis, the paper estimates that the deadweight loss of holiday giving in the United States in 1992 was between $4 billion and $13 billion. The article does note one possible saving grace: when recipients are ill informed about the existence of things they might enjoy, a gift can be worth more than a transfer of the equivalent quantity of cash. Of course, providing the cash and the information would achieve the same effect, without the risk that the choice will be different from what the recipient would have done with the money themself.

Gifts from friends and significant others are most efficient (largely because they know the preferences of the recipient best), while “noncash gifts from members of the extended family” are most likely to be valued by the recipient at less than their cost of purchase. Recipients value gifts from friends at 98.8% of their actual value, while those from significant others are valued at 91.7%. Parents and siblings give gifts worth 85% of their cost, while aunts and uncles manage only 64.4% and 62.9%, respectively. These conclusions were reached largely on the basis of surveys given to Yale undergraduates (favourite targets for psychological and economic experiments). Waldfogel notes that a social stigma can exist against giving cash gifts, but it is weakest where aunts, uncles, and grandparents are concerned – not coincidentally, the least effective choosers of gifts.

The thought counts

I have a more wide-ranging response of my own. Thankfully, there is a phenomena that partially offsets imperfect gift choice losses: the extent to which the very status of something as a gift increases its value in the eyes of the recipient. I can think of scores of cases where a product or service that would not have been particularly gratifying if purchased for myself was especially welcome and meaningful when received from someone else. In many cases, this creates utility significantly greater than that which could be achieved through personal spending of an equivalent sum.

I was reminded of all this when I saw Waldgofel’s article mentioned on Marginal Revolution, an interesting economics blog.

A (very) partial response to David Suzuki

Last night, I saw David Suzuki speak at a conference on health and the environment. To my surprise, I was far from impressed with most of what he said. He essentially presented a false binary: conspicuous consumption on the one hand, or the preservation of pristine nature on the other. While I certainly acknowledge that a lot of consumption is unnecessary, that doesn’t mean that all sacrifices are of the same moral variety as him choosing not to fly to Australia.

The view that pesticides should not be used in farming was broadly echoed. No doubt, there can be abuse of pesticides and there is a human and ecological cost associated with employing them. That said, it hardly seems that we can take a message of pesticide abandonment to a world of six billion, in which one and a half billion live in extreme poverty. Calling for an end to economic growth means something rather different in Canada than it does in Brazil or Bangladesh or Bolivia. Likewise, not everyone in Canadian society can switch to more ecological (and expensive) options while making only trivial sacrifices.

As a public relations figure, Suzuki obviously has to simplify his messages and present things in a form that is fairly easily repeated and absorbed. That said, the parks-versus-SUVs form of environmentalism doesn’t have much chance of being relevant outside the thinking of a privileged global elite.

Public broadcasters and the web

The existence of the internet changes the economic logic of public broadcasting. Where, at one point, the BBC was a collection of channels, each showing one bit of their vast archive at a time, now much of it is online. That creates a huge database of materials, paid for by taxpayers, and ideally free to be accessed without copyright concerns. Being able to view documentaries like Dangerous Knowledge upon demand is a notable benefit, and one not adequately captured by private sector content generators who are not concerned about societal benefits not captured in their profits.

If all the world’s national broadcasters and other public generators of knowledge would open up their libraries comprehensively, it could make the internet an even more valuable thing than it already is. Unfortunately, that process seems likely to be piecemeal and marked by set-backs. Witness the BBC iPlayer dispute.

Gore’s ten points

Al Gore has recently presented a ten-point plan for the United States to deal with climate change over the course of the next few decades:

An immediate “carbon freeze” that would cap U.S. CO2 emissions at current levels, followed by a program to generate 90% reductions by 2050.
Start a long-term tax shift to reduce payroll taxes and increase taxes on CO2 emissions.
Put aside a portion of carbon tax revenues to help low-income people make the transition.
Create a strong international treaty by working toward “de facto compliance with Kyoto” and moving up the start date for Kyoto’s successor from 2012 to 2010.
Implement a moratorium on construction of new coal-fired power plants that are not compatible with carbon capture and sequestration.
Create an “ELECTRANET” — a smart electricity grid that allows individuals and businesses to feed power back in at prevailing market rates.
Raise Corporate Average Fuel Economy (CAFE) standards.
Set a date for a ban on incandescent light bulbs.
Create “Connie Mae,” a carbon-neutral mortgage association, to help defray the upfront costs of energy-efficient building.
Have the Securities and Exchange Commission require disclosure of carbon emissions in corporate reporting, as a relevant “material risk.”

A much more detailed discussion of the points can be found on Grist. It is safe to expect considerable elaboration in Gore’s upcoming book: The Path to Survival. It will be available as of Earth Day (April 22nd) of 2008.

It is an interesting – and distinctly American – mix. It seems like number one is the uber-recommendation, while the others are more specific subsidiary policies. Exactly how such a freeze could be implemented – politically, economically, and legally – is a massive question. That said, it is a list that targets many of the major opportunities for domestic emission mitigation. It will be interesting to see whether any of these get the endorsement of Democratic or Republican candidates in the run-up to the 2008 Presidential election. If so, it will make for a big break with past half-hearted and voluntary measures.

PS. Those unfamiliar with the American mortgages will understand number nine better if they read about Fannie Mae and Freddie Mac: America’s huge and bizarrely named quasi-government-backed mortgage corporations.

Passivhaus

There has been a lot of talk lately about compact fluorescent light bulbs. Huge billboards of David Suzuki looking like a genie, with a glowing CF bulb floating above his hand, dot the landscape. While these bulbs are a lot more efficient, they aren’t likely to make a huge difference in the long run. Arguably, it would be better to focus on encouraging the building of passive houses, which require no energy for heating, rather than making marginal improvements in existing dwellings. It may be entirely desirable to do both, but when it comes to finding a symbolic signal issue to rally around as energy conservationists, the latter option is a lot more impressive.

To qualify as a passive house, a building must use less than 15 kWh per square metre per year for heating. That works out to less than $1 per square metre at current energy prices in Ontario. Total primary energy usage for such houses (heating, hot water, and electricity) is not to exceed 120 kWh per square metre per year. The technology to do this isn’t absolutely cutting edge: a passive house has been continuously inhabited in Darmstadt since 1991.

Apparently, building super-insulated houses with the ability to heat and cool themselves using just the ambient light and heat in their surroundings does not cost significantly more than building ordinary houses (though it requires different materials and more expertise). Given how virtually none of them exist in North America, it seems fair to say that consumer demand – even with high energy prices – is not sufficient to drive a large scale shift.

A number of different policies could help boost adoption: municipalities could require that a certain proportion of commercial and residential buildings constructed be passive in this way, subsidies or tax breaks could be given to firms that choose to employ such construction methods, and so forth. At the very least, government could make a concerted effort to do most of its own building in this way.

Masses of additional information is online:

As environmental statements go, building or living in such a house is probably much better than driving a Prius.

Chevron’s climate game

Remember when the BBC came up with a climate change game? Well, now Chevron has done so, as well. Apparently, all the data in the game came from the Economist Intelligence Unit. The BBC game suffered a fair bit of well-deserved criticism. I have yet to give the Chevron simulation a comprehensive try, but I am waiting with a fair bit of curiousity for a chance.

You can read a bit more about the Chevron game on R-Squared: a popular energy blog.

[9 September 2007] This game doesn’t really have much to it. By constraining you to the management of a single city over the span of a couple of decades, it excludes both the chronological and geographic scale at which real change needs to take place. Still, it is interesting from a corporate public relations standpoint. Unsurprisingly, the game simply forbids you from using a power balance that excludes petroleum.

Shrimponomics

Here is an interesting blog post analyzing theories about why people are eating more shrimp than was previously the case. In short, people without training in economics seem to focus more on the demand side than people with such training.

One response that surprised me was “a rise in the number of vegetarians who will eat shrimp.” Now, if you are a vegetarian because you think it is wrong to kill cows and chickens for food, that may be a sensible position. If you are a vegetarian for general reasons of ecological sustainability, it is a lot less valid. As fisheries go, shrimp is one of the worst when it comes to bycatch. The UN Food and Agriculture Organization says that the present shrimp catch is at least 50% above the maximum sustainable level. Shrimp also tends to be collected through a process called bottom trawling: where large steel rollers smash and kill everything on the ocean floor.

Shrimp aquaculture is arguably even worse. There are all the problems attendant to all agriculture – close quarters, disease, harvesting other creatures unsustainably to turn into feed, antibiotics, etc – and then there is the fact that mangrove swamps are ideal for conversion into shrimp farms. The UN Environment Programme estimates that 1/4 of the total destruction of these important ecosystems has been brought about by shrimp farming.

From an ecological standpoint, vegetarianism (and probably veganism) remains a far preferable option, compared to eating meat.