Economics – Page 130 – a sibilant intake of breath

Farewell to horns

This blog has previously mentioned the process of ‘fishing down’ marine food webs: you start with big delicious predator species (tuna, salmon, etc) and fish them to local extinction. Then, you catch smaller and less tasty things until the area of sea contains only plankton and jellyfish. This is a rational thing to do in the right circumstances: where access to a certain area of sea is free and unrestricted, and where everyone else is driving the resource towards destruction anyway. The best you can do individually is cash in while you can, since the resource is getting destroyed anyhow.

It seems that something similar is happening in relation to horns used for traditional Chinese medicine. Back in 1991, conservationists concerned about the decimation of rhino populations for medicinal purposes tried to encourage the use of Saiga Antelope (Saiga tatarica) horn instead. The World Wildlife Fund tried to encourage pharmacists to substitute the horns of the less endangered antelopes for those of the more endangered rhinos. Now, antelope populations in Russia and Kazakhstan have fallen from over 1,000,000 to just 30,000 (a 97% decline).

Switching from the unrestrained usage of one resource to the unrestrained usage of another just shifts the focus of the damage being caused. In order to create sustainable outcomes, restraint must be enforced either through economic means or regulation.

As an aside, there does seem to be some scope for reducing the horn trade by reducing demand through education. While horn is apparently an effective remedy for fever (though less good than available drugs not made from endangered species), the idea that it is an effective aphrodisiac can be countered. The rigid appearance of horn hardly makes it likely that it actually has chemical aphrodisiac properties, though it may strengthen the placebo effect already bolstered by general reverence for tradition. Apparently, the advent of Viagra has reduced prices and demand for rhino horn as well as seal and tiger penises that have traditionally been employed (though less effectively) to the same end.

Treating malaria

Legend has it that the gin and tonic cocktail evolved to provide the administrators of the British Empire with both ethanol and quinine. The former would keep them happy, and the latter would help keep malaria-carrying mosquitos at bay. In the present day, chloroquinine is still a common treatment for malaria. At 20-40 cents a dose, it is dramatically cheaper than the more effective alternative: a drug called artemisinin which is derived from the Artemisia annua shrub. A course of artemisinin treatment costs between $5 and $7 – too much for many people in the developing world.

Also problematic is how using artemisinin-only treatments will rapidly lead to drug resistance in mosquito populations. Mutations that confer advantages against a particular compound are relatively common, and are strongly selected for by evolution once they occur. It is much less likely that a malarial parasite will evolve both resistance to artemisinin and to a drug used in combination before one compound or the other kills it. As such, artemisinin combination therapies (ACTs) are the preferred treatment. These are somewhat more expensive, at $6 to$10 for a course of treatment.

Several organizations are trying to tackle the cost issue. In particular, the World Bank and the Bill and Melinda Gates Foundation are cooperating on a scheme called the Affordable Medicines Facility-malaria (AMFm). Given that malaria continues to kill 1-3 million people per year – and sicken between 400 and 900 million – such efforts are to be applauded and encouraged.

Climate ethics principles

Last November, the United Nations Framework Convention on Climate Change convened a meeting in Nairobi. One document that resulted from that meeting was the White Paper on the Ethical Dimensions of Climate Change (PDF). On the basis of arguments similar to those I have heard from Henry Shue and Stephen Gardiner, the document lists seven things that states intending to behave ethically on the climate change problem should do:

Immediately acknowledge that they have a duty to reduce their emissions as quickly as possible to their fair share of safe global emissions;
Immediately agree that an international greenhouse gas atmospheric stabilization target should be set as low as possible unless those who are most vulnerable to climate change impacts have consented to be put at risk from higher levels;
No longer use scientific uncertainty or cost to their economies alone as justification for refusing to reduce GHG emissions;
No longer refuse to reduce GHG emissions now on the basis that new less-costly technologies will be available in the future or that not all other nations have agreed to reduce their GHG emissions;
Accept national targets for assuring that atmospheric concentrations of GHG are protective of human health and the environment that are based upon ethically supportable allocation criteria;
Acknowledge that nations commit human rights violations that refuse to reduce their GHG emissions to their fair share of global emissions needed to protect those most vulnerable from climate change to loss of life, health, and well-being;
Accept that those who are responsible for climate change have a duty to pay for costs of adaptation to and unavoidable damages from climate change.

Generally speaking, these are fine principles. If every major emitting state adopted them, it is entirely plausible that emissions could be brought down to sustainable levels within the next couple of decades and that the inevitable consequences of climate change from past emission could be equitably addressed. What the list fails to consider is the inherent Nash Equilibrium problem. States do not act as all states would act in an ideal world; rather, they generally act in a way that is rational given their inability to control the actions of other states. Given the Stern conclusion that mitigation is far less expensive than inducing and enduring climate change, it would be in the interest of all states to mitigate. Given how many states are proving reluctant to take that seriously, states that are serious about tackling the problem find themselves pushed towards a rationality of building up adaptive capacity instead of reducing emissions.

All that said, ethicists are not meant to be pragmatists. Having a well-argued idea of what ethical behaviour in the face of climate change would be provides a cognitive platform from which to evaluate current actions. It may also help to raise the overall profile of the issue in democratic states where moral and ethical argumentation can be an important element of the political process.

Carbon pricing and GHG stabilization

Virtually everyone acknowledges that the best way to reduce greenhouse gas emissions is to create a price for their production that someone has to pay. It doesn’t matter, in theory, whether that is the final consumer (the person who buys the iPod manufactured and shipped across the world), the manufacturer, or the companies that produced the raw materials. Wherever in the chain the cost is imposed, it will be addressed through the economic system just like any other cost. When one factor of consumption rises in price, people generally switch to substitutes or cut back usage.

This all makes good sense for the transition from a world where carbon has no price at all and the atmosphere is treated as a greenhouse gas trash heap. What might become problematic is the economics of the situation when greenhouse gas emissions start to approach the point of stabilization. If we get 5 gigatonnes collectively, that means a global population of 11 billion will get about half a tonne of carbon each.

Consider two things: Right now, Canadian emissions per person are about 24.3 tonnes of CO2 equivalent. Cutting to about 0.5 is a major change. While it may be possible to cut a large amount for a low price (carbon taxes or permits at up to $150 a tonne have been discussed), it makes sense that people will be willing to pay ever-more to avoid each marginal decrease in their carbon budget. Moving from 24.3 tonnes to 20 might mean carrying out some efficiency improvements. Moving from 20 to 10 might require a re-jigging of the national energy and transportation infrastructures, carbon sequestration, and other techniques. Moving from 10 to 0.5 may inevitably require considerable personal sacrifice. It certainly rules out air travel.

The next factor to consider if the effect of economic inequality on all this. We can imagine many kinds of tax and trading systems. Some might be confined to individual states, and others to regions. It is possible that such a scheme would eventually be global. With a global scheme, however, you need to consider the willingness of the relatively affluent to pay thousands or tens of thousands of dollars to maintain elements of their carbon-intensive lifestyles. This could mean that people of lesser means get squeezed even more aggressively. It could also create an intractable problem of fraud. A global system that transfers thousands of dollars on the basis of largely unmeasured changes in lifestyle could be a very challenging thing to authenticate.

These kinds of problems lie in the relatively distant future. Moving to a national economy characterized by a meaningful carbon price is likely to take a decade. Moving to a world of integrated carbon trading may take even longer. All that admitted, the problems of increasing marginal value of carbon and the importance of economic inequality are elements that those pondering such pricing schemes should begin to contemplate.

Geoengineering: wise to have a fallback option

Over at RealClimate they are talking about geoengineering: that’s the intentional manipulation of the global climatic system with the intent to counteract the effects of greenhouse gasses. Generally, it consists of efforts to either reflect more solar energy back into space or enhance the activity of biological carbon sinks. It has been mentioned here before.

The fundamental problem with all geoengineering schemes (from sulfite injections to plankton tubes to giant mirrors) is that they risk creating unexpected and negative side-effects. That said, it does seem intelligent to investigate them as a last resort. Nobody knows at what point critical physical and biological systems might tip into a cycle of self-reinforcing warming. Plausible examples include permafrost melting in the Arctic, releasing methane that heats the atmosphere still more, or the large-scale burning of tropical rainforests, both producing emissions and reducing the capacity of carbon sinks. If physical or biological systems became net emitters of greenhouse gasses, cutting human emissions to zero would not be sufficient to stop warming; it would simply continue until the planet reached a new equilibrium.

Given linear projections of climate change damages, we would probably be wisest to heed the Stern Review and spend adequately on mitigation. Given the danger of strong positive feedbacks, it makes sense to develop some fallback options for use in desperate times. It seems to me that various forms of geoengineering should be among them. Let us hope they never need to be used.

Mechanism design theory

The 2001 Nobel Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph Stiglitz for their work on asymmetric information. One standard assumption in neoclassical economic models is that all participants in a transaction have ‘perfect information’ about the goods or services being exchanged. The field of behavioural economics is now seeking to deepen such models, so that they can better reflect the kind of dynamics that exist in real markets.

Asymmetric information is a key factor in the functioning of real markets. When you buy a used car, the person at the lot probably knows more about it than you do. The salesperson knows more about used cars in general, may have spoken with the original seller, and may have investigated this specific car. Conversely, you know more about your health risks than your health insurer (provided you live somewhere where health insurance is private). You might know, for instance, that all your relatives die of heart attacks on their 35th birthdays and that you personally drink 3L of whisky per day.

This year’s Nobel Prize in Economics was awarded to Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson for their work on mechanism design theory. The basic purpose of the theory is to deal with problems like those of assymetric information: take a situation where people would normally have an incentive to behave badly (lie, cheat, etc) and establish rules to make it no longer in their interest to do so. We might, for instance, require used car salespeople to provide some sort of guarantee, or we might allow health insurers to void the policies of individuals who lie about their health when premiums are being set.

Reading about mechanism design feels a bit like watching engineers try to create religious commandments. This section from the Wikipedia entry illustrates what I mean.

Mechanism designers commonly try to achieve the following basic outcomes: truthfulness, individual rationality, budget balance, and social welfare. However, it is impossible to guarantee optimal results for all four outcomes simultaneously in many situations.

While it does seem a bit counterintuitive to try to achieve these things through economic means, it is probably more durable than simply drilling axioms into people’s heads. That is especially true when the counterparty they are dealing with is some distant corporation; people who would never cheat someone standing right in front of them are much more willing to deceive or exploit such a distant and amorphous entity.

Cleaner coal

Coal is a witches’ brew of chemicals including hydrocarbons, sulphur, and other elements and molecules. Burning it is a dirty business, producing toxic and carcinogenic emissions including arsenic, selenium, cyanide, nitrous oxides, particulate matter, and volatile organic compounds. Coal plants also produce large amounts of carbon dioxide, thus contributing to climate change. That said, some coal plant designs can reduce both toxic and climatically relevant emissions to a considerable extent. Given concerns about energy security – coupled with the vast coal reserves in the United States, United Kingdom, China, and elsewhere – giving some serious thought to cleaner coal technology is sensible.

Integrated Gasification Combined Cycle (IGCC) plants are the best existing option for a number of reasons. Rather than burning coal directly, they use heat to convert it into syngas, which is then burned. Such plants can also produce syngas from heavy petroleum residues (think of the oil sands) or biomass. One advantage of this approach is that it simplifies the use of carbon capture and storage (CCS) technologies, which seek to bury carbon emissions in stable geological formations. This is because the carbon can be removed from the syngas prior to combustion, rather than having to be separated from hot flue gases before they go out the smokestack.

The problems with IGCC include a higher cost (perhaps $3,593 per kilowatt, compared with less than $1,290 for conventional coal) and lower reliability than simpler designs (this diagram reveals the complexity of IGCC systems). In the absence of effective carbon sequestration, such plants will also continue to emit very high levels of greenhouse gasses. If carbon pricing policies emerge in states that make extensive use of coal for energy, both of these problems may be reduced to some extent. In the first place, having to pay for carbon emissions would reduce the relative cost of lower-emissions technologies. In the second place, such pricing would induce the development and deployment of CCS.

One way or another, it will eventually be necessary to leave virtually all of the carbon that is currently trapped in coal in the ground, rather than letting it accumulate in the atmosphere. Whether that is done by leaving the coal itself underground or simply returning the carbon once the energy has been extracted is not necessarily a matter of huge environmental importance (though coal mining is a hazardous business that produces lots of contamination). That said, CCS remains a somewhat speculative and unproven technology. ‘Clean coal’ advocates will be on much stronger ground if a single electricity generating, economically viable, carbon sequestering power plant can be constructed.

Hot Air

Hot Air: Meeting Canada’s Climate Change Challenge is a concise and virtually up-to-the-minute examination of Canadian climate change policy: past, present, and future. Jeffrey Simpson, Mark Jaccard, and Nic Rivers do a good job of laying out the technical and political issues involved and, while one cannot help taking issue with some aspects of their analysis, this book is definitely a good place to start, when seeking to evaluate Canada’s climate options.

Emission pathways

Hot Air presents two possible emissions pathways: an aggressive scenario that cuts Canadian emissions from 750 Mt of CO2 equivalent in 2005 to about 400 Mt in 2050, and a less aggressive scenario that cuts them to about 600 Mt. For the sake of contrast, Canada’s Kyoto commitment (about which the authors are highly critical) is to cut Canadian emissions to 6% below 1990 levels by 2012, which would mean emissions of 563 Mt five years from now. The present government has promised to cut emissions to 20% below 2006 levels by 2020 (600 Mt) and by 60 to 70% by 2050 (225 to 300 Mt). George Monbiot’s extremely ambitious plan calls for a 90% reduction in greenhouse gas emissions by 2030 (75 Mt for Canada, though he is primarily writing about Britain).

While Monbiot’s plan aims to reach stabilization by 2030, a much more conventional target date is around 2100. It is as though the book presents a five-decade plan to slow the rate at which water is leaking into the boat (greenhouse gasses accumulating in the atmosphere), but doesn’t actually specify how to plug the hole before it the boat sinks (greenhouse gas concentrations overwhelm the ability of human and natural systems to adapt). While having the hole half-plugged at a set date is a big improvement, a plan that focuses only on that phase seems to lack an ultimate purpose. While Hot Air does not continue its projections that far into the future, it is plausible that the extension of the policies therein for a further 50 years would achieve that outcome, though at an unknown stabilization concentration. (See this prior discussion)

Policy prescriptions

Simpson, Jaccard, and Rivers envision the largest reductions being achieved through fuel switching (for instance, from coal to natural gas) and carbon capture and storage. Together, these account for well over 80% of the anticipated reductions in both scenarios, with energy efficiency improvements, agricultural changes, waste treatment changes, and other efforts making up the difference. As policy mechanisms, the authors support carbon pricing (through either a cap-and-trade scheme or the establishment of a carbon tax) as well as command-and-control measures including tightened mandatory efficiency standards for vehicles, renewable portfolio standards (requiring a larger proportion of energy to be renewable), carbon management standards (requiring a larger proportion of CO2 to be sequestered), and tougher building standards. They stress that information and subsidy programs are inadequate to create significant reductions in emissions. Instead, they explain that an eventual carbon price of $100 to $150 a tonne will make “zero-emissions technologies… frequently the most economic option for business and consumers.” This price would be reached by means of a gradual rise ($20 in 2015 and $60 in 2020), encouraging medium and long-term investment in low carbon technologies and capital.

Just 250 pages long, with very few references, Hot Air takes a decidedly journalistic approach. It is very optimistic about the viability and affordability of carbon capture and storage, as well as about the transition to zero emission automobiles. Air travel is completely ignored, while the potential of improved urban planning and public transportation is rather harshly derided. The plan described doesn’t extend beyond 2050 and doesn’t reach a level of Canadian emissions consistent with global stabilization of greenhouse gas concentrations (though it would put Canada on a good footing to achieve that by 2100). While the book’s overall level of detail may not satisfy the requirements of those who want extensive technical and scientific analysis, it is likely to serve admirably as an introduction for those bewildered by the whole ecosystem of past and present plans and concerned with understanding the future course of policy.

The true price of nuclear power

Several times this blog has discussed whether climate change is making nuclear power a more acceptable option (1, 2, 3). One element of the debate that bears consideration is the legacy of contamination at sites that form part of the nuclear fuel cycle: from uranium mines to post-reactor fuel processing facilities. The Rocky Flats Plant in the United States is an especially sobering example.

Insiders at the plant started “tipping” the FBI about the unsafe conditions sometime in 1988. Late that year the FBI started clandestinely flying light aircraft over the area and noticed that the incinerator was apparently being used late into the night. After several months of collecting evidence both from workers and by direct measurement, they informed the DOE on June 6, 1989 that they wanted to meet about a potential terrorist threat. When the DOE officers arrived, they were served with papers. Simultaneously, the FBI raided the facilities and ordered everyone out. They found numerous violations of federal anti-pollution laws including massive contamination of water and soil, though none of the original charges that led to the raid were substantiated.

In 1992, Rockwell was charged with minor environmental crimes and paid an $18.5 million fine.

Accidents and contamination have been a feature of facilities handling nuclear materials worldwide. Of course, this does not suffice to show that nuclear energy is a bad option. Coal mines certainly produce more than their share of industrial accidents and environmental contamination.

The trickiest thing, when it comes to evaluating the viability of nuclear power, is disentangling exactly what sort of governmental subsidies do, have, and will exist. These subsidies are both direct (paid straight to operators) and more indirect (soft loans for construction, funding for research and development). They also include guarantees that the nuclear industry is only responsible for a set amount of money in the result of a catastrophic accident, as well as the implicit cost that any contamination that corporations cannot be legally forced to correct after the fact will either fester or be fixed at taxpayer expense. Plenty of sources claim to have a comprehensive reckoning of these costs and risks, but the various analyses seem to be both contradictory and self-serving.

Before states make comprehensive plans to embrace or reject nuclear power as a climate change mitigation option, some kind of extensive, comprehensive, and impartial study of the caliber of the Stern Review would be wise.

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.