Outside the box

Will Wilkinson wants to know whether climate change worriers are as interested in abatement as they are in prevention:

Also… from Warren Meyer I see this: “[Some climate scientists] claim now that man-made sulfate aerosols and black carbon are cooling the earth, and when some day these pollutants are reduced, we will see huge catch-up warming.”

Has anyone in the Pigou Club advanced the argument for subsidizing sulfate aerosols and black carbon (and whatever else has cooling effects)?

That's a good question; there's no reason that global warming has to be fixed through conservation, and in part the focus on conservation has a lot to do with what the environmentalists would say is a broader worry about outstripping the planet's sustainable carrying strategy, and what their critics would call an aesthetic fixation on a low-consumption lifestyle. Me, I think it's probably a little bit from column A, a little bit from Column B. But either way, using AGW as a stealth way to advance your other agendas is a little bit disingenuous.

As to the particulars of Will's question, however, I certainly hope no one's arguing in favor of subsidies for suflate aerosol emission, since we just implemented a massive emissions trading program to remove the damn things from the atmosphere. Sulfate aerosols are what cause acid rain.

Liquid assets

I was chatting with a transportation expert over the weekend about carbon taxes and so forth. His view is that carbon taxes are, for cars, mostly window dressing. The price of oil varies by much more than any politically feasible carbon tax in America. Moreover, if global oil production has really peaked¹, then supply constraints will become a dominant contributor to the price as well. America will move to smaller, denser housing, not because the government tells them to, but because they will no longer be able to afford the heating and transportation for large, dispersed homes.

Where carbon taxes may make a difference is in preventing coal-to-liquids from becoming a viable substitute for gasoline. CTL has a terrible carbon profile, and it isn't particularly good for other bits of the environment either. This sets up an interesting political problem for the future. The public debate over carbon has focused on driving, because right now it's mostly aimed at securing voluntary consumer cooperation, and consumers don't have much control over what sort of plants their power generator uses. But if oil truly becomes as expensive as the peak oil folks think, coal will suddenly become a major battleground, as producers promise consumers cheap(er) fuel--and Senator Byrd shifts his efforts from paving West Virginia into one shining sheet of asphalt, towards gaining massive CTL research subsidies. You may see the West Virginia delegation increasingly allied with Michigan.

¹a notion of which I am somewhat skeptical, although Hugo Chavez is certainly doing his best to make sure that the-artist-formerly-known-as-Venezuela's-bitumen never makes it onto the world oil markets in any quantity

Focus, people

I haven't read the Obama plan yet, but I think I already disagree with Ryan Avent's take on it:

I’m a lot less excited about the billions of dollars promised to research efforts on things like carbon capture and sequestration, or “the next generation of biofuels and fuel delivery infrastructure, accelerating commercial production of plug-in hybrid vehicles, promoting larger-scale renewable energy projects and low-emission coal plants, and making the electricity grid digital.” Not that those wouldn’t be great things. It’s just that 1) if we price carbon correctly, firms will have lots of incentives to do this stuff anyway, without billions in public money. And 2) there are large opportunity costs to spending money on projects for which the payoff is unsure–namely, we can’t spend that money on things NOW that we KNOW will pay off.

Look, it’s very nice to see that Obama mentions planning and mass transit. What he doesn’t do is attach anything remotely reminiscent of a dollar sign to those paragraphs. And that’s a mistake. Next year, federal funding for mass transit and Amtrak combined will total about $3 billion. A mere 2 percent of the $150 billion Obama is talking about spending on research would double the budgets for those programs; that is, small amounts can have big effects. Everything we know about cities with public transit suggests that such systems can substantially reduce per capita carbon outputs. Combining any program to increase the price of carbon with investment in public transit would result in an immediate and tangible reduction in carbon emissions. Of this we can be absolutely sure.

The reason I disagree was outlined in the one part of the much discussed Nordhaus/Shellenberger article that I think really nailed it:

Increasing energy use is the primary cause of global warming, but it is also a primary cause of rising prosperity, longer life spans, better medical treatment, and greater personal and political freedom. Environmentalists can rail against consumption and counsel sacrifice all they want, but neither poor countries like China nor rich countries like the United States are going to dramatically reduce their emissions if doing so slows economic growth. Given this, the challenge we face as a species is to roughly double global energy production by mid-century while simultaneously cutting greenhouse gas emissions in half worldwide (and about 80 percent in the United States), so that we can avoid the worst consequences of climate change.

. . . environmental lobbyists in Washington today are overwhelmingly focused on addressing global warming through two overlapping strategies. First, they want to establish a cap on greenhouse gases that decreases over time. Second, they want to make clean-energy sources cost-competitive by increasing the cost of dirty energy. While there is great debate about how to best implement these strategies--whether through traditional command-and-control regulatory mechanisms, market-based cap-and-trade approaches, or an outright tax on carbon emissions--there is little question that the solution is pollution regulation.

It is not. The challenge is simply too large. In 2007, human beings will consume roughly 15 terawatts of energy worldwide. That level of energy use will rise rapidly over the next 100 years due to population growth and increasing living standards, especially among the global poor. By the year 2100, humankind will need to produce and consume roughly 60 terawatts of energy if every human on earth is to reach the level of prosperity enjoyed today by the world's wealthiest one billion people. Even if economies were to become much more efficient, the total terawatts needed to bring all of humankind out of poverty would still need to roughly double by 2050 and triple by century's end.

Consider China. Today, the country is rumbling with rising prosperity, rising expectations, rising demands for freedom--all fueled by cheap, dirty coal energy. This year or next, China will surpass the United States as the world's largest producer of greenhouse gas emissions. And yet, the average Chinese still consumes less than 20 percent of the energy consumed by the average American, meaning that the Chinese contribution to global warming is going to grow tremendously. After all, neither the Chinese people nor the Chinese government will accept any solution that does not allow energy consumption comparable to our own.

The only way to double global energy consumption while cutting global warming emissions in half is by developing new sources of clean energy.

Cutting driving in America will undoubtedly reduce our oil and carbon consumption. But it will do nothing to reduce consumption elsewhere. If oil production has peaked, as a growing number of experts believe, then having Americans burn less oil in their cars will do nothing but transfer that oil to be burend in less efficient engines in China and India. This is fine poverty policy, but it will do nothing to reduce global warming.

A carbon tax needs to be part of a policy to produce alternatives to cheap Chinese coal and growing demands for automobile use in the developing world, not part of a strategy to see how virtuous we can become while ignoring what is happening in the developing world. I see Obama's plan for pouring billions into R&D as a way to accomplish that. Mind you, I'm not sure I like the plan. But as a general strategy, I think finding clean and cost effective technologies should be the priority over eking out efficiency gains from the technologies we already have. After all, if we have them, so does China--and china is nonetheless overtaking us as the world's leading emitter of greenhouse gasses.

In theory, practice is the same as theory. In practice, it differs.

Ryan Avent speculates that the reason that Americans are opposed to a carbon tax, despite their avowal of support for action on global warming, is that they don't understand how the tax works very well.

I'd say they understand it all too well: a tax will make it more expensive for them to drive, forcing them to do less of it. If they didn't like driving right now, they wouldn't be doing so much of it.

This is true of a lot of policy plans for which advocates claim a groundswell of mass support: people support them in abstract, but in actual particulars, they are against them. People support universal healthcare--until the majority who are perfectly satisfied with their health care right now hear the details of the plans, and the taxes required to pay for the plans. People like wars, but not the part where we spend a lot of money and soldiers die. People think we should do something about the environment--but only as long as it doesn't involve driving less, or buying smaller, more fuel efficient vehicles and homes, or giving up the long-distance plane flight to Disneyworld, or . . . well, when you come right down to it, what Americans have so far proven willing to do is buy biodegradeable cleaning products once a year, and waste a lot of carbon dioxide talking about how the government should do something.

A feature, not a bug

Econospeak identifies a "problem" with carbon taxes:

But relying on carbon taxes is also a terrible way to finance the government. We are talking about half a trillion dollars or so in revenue, so the percentage of financing would be quite large. Income fluctuates, and that is a problem, but the spending on a particular set of items, like fossil fuels, has the potential to fluctuate even more. Example: suppose we really are facing an oil production peak, and scarcity causes the price to spike? Every 10% rise in oil prices will tend to cause something like a 5% reduction in long run demand (I’m rounding here – and thanks to Gar Lipow for his valuable work in collating the evidence), but this also means less carbon tax revenue, potentially a lot less. This is a serious problem, one that the green taxers have not really confronted.

Oh no! Less revenue for the government! Why, we might have to do something unthinkable impossible, like--cut spending.

In fact, gas tax revenues aren't particularly volatile. In 2004, picking one state at random, Minnesota raised $648 million with its gas tax. In 2006, after the efficiency effects of higher prices, it raised . . . $629 million.

Compare that with income tax revenue. Just between 2003 and 2006, Federal tax revenues grew by $625 billion, somewhat less than double what would have been expected had they remained constant as a percentage of GDP.

Long, slow declines in revenue, such as those seen in the gas tax, are easily dealt with by cutting spending, or, more likely, raising the other taxes. States worried about gas tax revenues, for example, are now experimenting with GPS-based road-pricing. At the federal level, we could raise marginal income tax rates or decrease the standard deduction to compensate.

Update A confused commenter demands that I document the changes in percentage terms. All right; the fall in Minnesota gas taxes, during a period in which the price of oil roughly doubled, was less than 3%. The change in federal tax revenues over a slightly longer period (4 years rather than 3) was 11.5%. We are clearly able to handle changes of the magnitude that carbon tax revenue declines represent, particularly if politicians don't use every increase in revenue as an excuse to go on spending binges--a wan hope, I realize.

Blast from the past

Incidentally, I wrote about the problem of trying to do intergenerational cost-benefit analysis earlier this year:

The biggest problem is the easiest one to state: what is a cost and what is a benefit? How do you value the changes?

As I read it, Stern sort of punts when faced with these impossible calculations. Instead, it relies on status quo bias; now is good, so we should bequeath a world to our descendants that looks as much as possible like the one we live in today. Obviously, there are huge problems with status quo bias, most notably that none of us would like it at all if our ancestors had been at all successful in applying it. On the other hand, "better the devil you known than the devil you don't" is not an entirely awful heuristic. At any rate, that seems to be the underlying assumption of the report. The quickest way to produce that result financially is to set the pure rate of time preference to effectively nothing, and (says William Nordhaus) to rely on the more pessimistic forecasts.

Now, I actually find the moral intuition behind a zero rate of intergenerational time preference pretty compelling, but the practical implications are rather daunting. (A John Quiggin post responds that

"Strange as it may seem to Economist writers, there are phenomena in the world that aren’t particularly illuminated by applying economic concepts. Attitudes towards abortion have nothing at all to do with discounting rates."

Which doesn't strike me as illuminating, because the question at the heart of the Stern Report's choice of discount rates is no more a matter of economic concepts than abortion is. It's a moral philosophy problem: are we, or are we not, entitled to privilege our own interests over the interests of those who are not yet born, but probably will be? Otherwise, the low social discount rate is just a pseudomathematical attempt to dress up your preferences as science.)

Can one reject a compelling moral precept just because it's nearly impossible to live by? That's a question that devout Christians wrestle with every day. I am still thinking through this question. But my instinct to reject the precept simply because it would require me to overthrow half of my policy positions is not, at first glance, an admirable one.

But even if you accept a zero rate of intergenerational pure time preference, you can't just smack the pure time discount rate to zero and leave it. Discounting covers a multitude of financial sins by literally making them disappear. For example, if you have a very low rate of discounting, you run into a problem with future generations: there are too damn many of them. Because there are so many of them, even trivial income streams have extremely high net present values.

This is easy to illustrate with a basic equation, such as a discounted cash flow. Let's say that in year one, we have $100 in income, growing at 3% a year. In year 1,000, this will have turned into an annual income of $687 trillion, give or take a few trillion. If, just to keep things fair, we discount this by the rate of growth, we will find that the net present value of income over the next 1,000 years is $100 x 999 or $99,900.

A 0.1% increase in future income over the next thousand years thus has a discounted present value of about a dime a year, which sums to $99. Using these sorts of discount rates, a cost benefit analysis indicates that we should be willing to surrender up to $89.99 in order to produce this small increase in future cash flows, a patently ridiculous result. Discounting takes care of this problem, because even with a low discount rate, the present value of constant income streams quickly declines to nothing. If you don't use discounting, you have to account for this in some other way, by selecting a utility threshold or something. And measuring utility is a rather tricky business.

Another problem is wealth disparities between generations. As I read it, the Stern Report basically assumes that there are low diminishing returns to income (it sets the elasticity of marginal utility of consumption, or η, to 1). It strikes me as odd to see the left half of the blogosphere supporting this proposition; I'm fairly sure that John Quiggin, who is a social democrat, thinks it is higher than that. (Or at least I hope he does). Heck, I think it is higher than that; this is why I support a progressive, indeed negative, income tax, rather than a flat tax. (Yes, yes, I know: I'm not a real libertarian. You may have my card and my secret decoder ring back.) Discounting takes care of this problem by getting rid of very rich future generations; having done away with it, we are now stuck with them, the lucky bastards. I don't even know how you value marginal utility of even large income streams when incomes are $6 trillion, but it has to be pretty trivial. (Or maybe that's what our ancestors thought about incomes of $30K.) Anyway, I'm unhappy with Stern's approach. I'm not sure that you can reconcile owing anything to that thousand year generation with even moderate utilitiarianism, unless you keep ratcheting up the price of Cape Cod views.

Then there's uncertainty. There's still an awful lot of it, and I am not picking up the banner of the global warming sceptic here--when Ron Bailey has switched sides, I think it's safe to say that this particular debate is over. But we are still left with all kinds of uncertainties about what exactly will happen, and about what the world will look like, economically, technologically, and so forth. Climate stabilisers may kick in; they may make everything worse; in fifty years we may have batteries that let us use solar and nuclear energy for basically everything, meaning global warming will go away. We could find other ways to abate climate change. We could be preventing the recurrance of a new ice age--don't laugh, from what I understand, we're about due. At the risk of sounding like a broken record, normal discounting takes care of this problem, because things become more uncertain the farther they are in the future. Discounting progressively lowers the weight placed on future income streams, until they rapidly vanish.

A fourth problem was pointed out by an economist of my acquaintance: if you do away with time preference, you can't just apply this to the environment; you have to apply it to everything. Perhaps our descendants would prefer flying cars to Bangladesh. If you deliberately apply these low discount rates selectively, that's not a serious intellectual effort; it is at best cargo cult science, at worst intellectual fraud. I, too, have a strong intuitive preference for leaving the planet to our descendants in as good as, or preferably better, condition than we found it. But I recognize that there are strong practical and moral challenges to this desire, and the costs of advancing my preferences by random application of high discount rates outweigh the benefits. Let me make it clear that I am not accusing Mr Stern or anyone else of acting in bad faith. I am just saying that I think committing to the discount rate also entails committing to its use in a range of other applications, or justifying your environmental preferences on other grounds. I presume that Mr Stern and all of his supporters are prepared to do so, or to convince me that I am wrong and that ultra low pure time discount rates are uniquely applicable to the environment.

Which of course raises the fifth, and possibly the biggest problem with Stern: who the heck knows what our descendants want? Again, discounting takes care of this problem by essentially saying, "to hell with those young whippersnappers!" But if you don't do this, you have to attempt to grapple with changing preferences, a task at which, if Fifties SF is anything to go by, you will almost certainly fail.

This is not support for the "do nothing" crowd; like Megan, I think we should do rather a lot, starting with (in America) really whopping gas and carbon taxes. I am against subsidies for alternative fuels as a policy matter; I want to use a cap-and-trade system on greenhouse emissions with declining annual quotas that includes gasoline. (Yes, yes, I'll never use the secret handshake again, either.) But having endorsed these methods, I don't know how much we need to shoot for--and given the crudeness of the Stern Report's methodology, after reading it I still don't know.

Known unknowns

When the Stern Commission came out with its famous report on global warming last year, suggesting drastic and immediate action to reduce emissions, Sir Partha Dasgupta issued one of the two most notable critiques. (The other came from William Nordhaus of Yale).

Now, however, Sir Partha is critiquing Bjorn Lomborg's new book. I regret that I cannot read the entire paper, which is behind a pay barrier, but Mark Thoma has a substantial excerpt:

Unfortunately, Lomborg's thesis is built on a deep misconception of Earth's system and of economics when applied to that system. The concentration of CO2 in the atmosphere is now 380 p.p.m., a figure ... in excess of the maximum reached during the past 600,000 years. If there is one truth about Earth we all should know, it's that the system is driven by interlocking, nonlinear processes running at different speeds. The transition to Lomborg's recommended concentration of 560 p.p.m. would involve crossing an unknown number of tipping points (or separatrices) in the global climate system. We have no data on the consequences if Earth were to cross those tipping points. They could be good, or they could be disastrous. Even if we did have data, they would probably be of little value because nature's processes are irreversible. One implication of the Earth system's deep nonlinearities is that estimates of climatic parameters based on observations from the recent past are unreliable for making forecasts about the state of the world at CO2 concentrations of 560 p.p.m. or higher. ...

These truths seem to escape Lomborg. His cost–benefit analysis involves only point estimates of variables..., implying that he believes we shouldn't buy insurance against potentially enormous losses resulting from climate change. ...

The integrated assessment models of Earth's system on which Lomborg builds his case are arbitrarily bounded on either side of his point estimates. It can be shown that if those bounds are removed (as they ought to be), even a small amount of uncertainty — when allied to only a moderate aversion to uncertainty — would imply that humanity should spend substantial amounts on insurance, even more than the 1– 2% of world output that has been advocated. If the uncertainties are not small, standard cost–benefit analysis as applied to the economics of climate change becomes incoherent, even if those uncertainties are judged to be thin-tailed (gaussian, for example); this is because the analysis would say that no matter how much humanity chooses to invest in protecting Earth from passing through those later tipping points, we should invest still more.

The catastrophic unknowns are, to my mind, the biggest economic challenge of global warming. As Sir Partha points out, we literally don't know what we don't know. And we have no very good economic framework for dealing with catastrophic risks when we cannot evaluate either the extent or the probability of the disaster. We may misunderestimate the probability of thousand year storms, but at least we've got a pretty good idea what a hurricane looks like.

Come, let us grow old together.

Daniel Engber has discovered the ZPG and voluntary extinction people:

Instead of burning down our numbers with oil and gas, we might follow the advice of the founder of the Voluntary Human Extinction Movement, who tells Weisman that everyone in the world should stop having kids all at once. Weisman isn't up for quite so drastic a measure, but he makes his own pitch, moderate in comparison: Let's cut the birth rate to one child per couple, for a few generations at least. The population would dwindle by about 5 billion people over the next century, he says, ensuring the habitability of the Earth for the 1.6 billion who remained. At that point, they could all reap the rewards of a more spacious planet, sharing in "the growing joy of watching the world daily become more wonderful." It seems like a notion from the fringe, but Weisman's book has become a mainstream best seller. Could population control be the next big thing in green culture?

He leaves out the strong probability that a planet that has only one child per couple will see its elderly abandoned quite early in their senescence. The elderly are extremely heavy consumers of labor intensive services. And unlike caring for children, caring for them is rarely rewarding, which is why they so often end up crammed alone, into nursing homes. This might be a good strategy for the planet, but it's a terrible strategy for the planet's future old people. Which I hope includes all of us.

Green is as green does . . .

Who cares if Al Gore goes on a private jet, as long as he buys the appropriate carbon offset?

(A private jet, for those who may not realize it, is just about the single most carbon-wasteful thing in the world, except maybe burning high-sulfur coal for the sheer fun of it.)

There are two ways an economist could look at this.

One way of looking at it is that he doesn't add any more carbon to the world than he would taking a commercial flight, or walking, provided he buys the offset. This assumes, of course, that offsets work, a question in some doubt. But as long as you're efficiently pricing the environmental cost to be actually carbon neutral, it's none of our business what sort of transportation you use.

But another way of looking at it is that if Al Gore cares about the environment, and is willing to pay, say $500 to take the equivalent of a private-jet-trip's worth of carbon out of the air, then he ought to do so regardless of whether he has flown. He ought to buy all of the carbon offsets he feels necessary or affordable--and then reduce carbon still further by taking a commercial flight, or a train. Since Al Gore seems to feel that we should all do everything possible to reduce our carbon footprint, this is not unreasonable. Taxation is the solution to problems where you cannot secure the voluntary restraint of others; it is odd to try the same stunt on yourself.

I'm not sure which view I find more compelling. Does Al Gore have an obligation to not merely stay carbon neutral, but try to reduce the profligacy of his neighbors? Does it matter that he's made a tidy sum from those neighbors exhorting them to lower their carbon footprint? People seem to feel intuitively that it does, but the actual logical reasoning generally seems fuzzy.

Air travel for me, excercise for thee

Carbon offsets have all sorts of problems. The methods used to calculate teh precise offset are often sketchy, and it's not clear to what extent offset carbon stays offset. Creating a market for greenhouse gas reduction may also have the undesireable effect of encouraging companies and governments to keep belching factories going until they can sell the offset, or even build new ones for the purpose of being paid to shutter them. But this is really something special. Upon original reading, I had thought that it must be taken out of context or otherwise misleading:

Climate Care celebrates the fact that it encourages the Indian poor to use their own bodies rather than machines to irrigate the land. Its website declares: ‘Sometimes the best source of renewable energy is the human body itself. With some lateral thinking, and some simple materials, energy solutions can often be found which replace fossil fuels with muscle-power.’ (2) To show that muscle power is preferable to machine power, the Climate Care website features a cartoon illustration of smiling naked villagers pedalling on a treadle pump next to a small house that has an energy-efficient light bulb and a stove made from ‘local materials at minimal cost’. Climate Care points out that even children can use treadle pumps: ‘One person - man, woman or even child - can operate the pump by manipulating his/her body weight on two treadles and by holding a bamboo or wooden frame for support.’ (3)

Feeling guilty about your two-week break in Barbados, when you flew thousands of miles and lived it up with cocktails on sunlit beaches? Well, offset that guilt by sponsoring eco-friendly child labour in the developing world! Let an eight-year-old peasant pedal away your eco-remorse…

But no, their website is exactly as described. To be fair, there apparently are other projects that don't involve tethering people in developing countries to human hamster wheels, but all in all, that may be one of the most appalling things I've ever read. Special bonus question: why are the smiling brown people naked? Have they given up clothes to save the energy of washing them?