Monday, December 15, 2008

A difficult set of numbers

The Rudd Government has released its CPRS White Paper which will form the basis of its emissions trading policy until 2020. The headline figure is the setting of an emissions reduction target of 5% (on 2000 levels) rising to an 'absolute maximum' of 15% if an international agreement is put in place.

Given the previous policy platform outlined on matters such as renewable energy, it is not surprising that the target ceiling has been set at 15%. The Garnaut Report stressed the significance of per capita emissions in setting targets and with Australia's population projected to grow considerably due to higher immigration and birth rates than European nations; it is not surprising that the Australian approach has been to adopt a markedly lower target range than Europe.

The revised CPRS design is reminiscent of the 'action target' approach that had previously been advocated by Argentina. The action target theory sets a target range which is varied based on economic activity, thus ensuring any cost burdens do not place an excessive lag on industry in vulnerable times. As the global economy has tracked downwards dramatically since the initial mooting of the CPRS, the ambition of the scheme has been scaled back to reflect the difficult economic position.

The difficulty in setting a target is demonstrated by the need to balance an existential threat of future damage from climate change against the immediate threat of the global economic downturn, particularly as the most trade-exposed industries that are in the vanguard of carbon emissions are the ones whose immediate prospects have been severely affected by reduced demand in places such as China. The need to maintain consensus is vital in this situation and keep the majority on board. This has led to the increased insulation of both businesses and households from price rises.

The unfortunate byproduct of this is a reduced emphasis on energy efficiency programs. Ideally, using energy efficiency as a means to both lower individual costs and streamline the economic structure to encourage more efficient use of energy would have both short-term cost saving and economic stimulus benefits and long-term restructuring advantages. It is important to note that during the Asian economic crisis, energy efficiency procedures actually broke down as lower demand reduced costs. The result was a Chinese industrial sector beset with out-of-control emissions growth. The introduction of the CPRS will not take place until 2010, so it is imperative that energy efficiency is promoted strongly for the next tweleve to eighteen months to prevent a massive shock when the carbon price signal takes effect.

Tuesday, September 9, 2008

A belated rejoinder

A few weeks back, Sam Roggeveen of the Lowy Institute came across this post offering an intuitive response to a Cato Institute article on the uneconomical nature of climate change mitigation.

Roggeveen made two criticisms of the post. Firstly, it did not offer grounds for preferring one discount rate over another, so it's not clear why the 'do very little' school is wrong. Secondly, it suggested the post implied all attempts to analyse climate change in these terms are bogus without offering an alternative.

Why the 'do very little school' is wrong - preferring discount rates

The reason why Stern's discount rate is to be preferred over Norhaus is that the discount rate represents not merely the future trend of economic growth (itself a considerable presumption in the face of major climate change impacts), but two ethical decisions.

The first ethical decision is the value that a given generation places on a particular good. This theory is called prioritism. Prioritism in this context means that future generations can make a lower claim on goods.

The second ethical decision is the choice to disregard events in the future simply because they are so far in the future that it really does not matter. This is called temporal impartiality. Economists have a fairly short-term view of the world which treats what happens in 2050 as almost negligble importance. Treating the future welfare as of little importance leads to a rapid rate of discounting for future costs. Norhaus ultimately ends up with the conventional discount rate of 6% per annum which applied to the finance market from 1900-2000.

Temporal impartiality and prioritism are thus interrelated ethical judgments rather than mere economic factors which go to the value one places on the position of future generations. The usual underlying assumption is that future generations are going to be richer and able to look after themselves so we in the present do not need to worry about their fate. The problem arises when one considers that future generations may not have the same easy access or unconstrained ability to deal with resources that we currently do, not to mention being further hampered by climatic conditions.

Stern's reduced discount rate means that the welfare of future generations is valued far more highly than conventional financial models and thus takes into account the principle of intergenerational equity which usually plays a very limited role in financial decision-making. It is to be preferred to Norhaus as it encompasses both the economic and moral implications of climate change.

Are all economic models wrong - the alternative?

Remarks made in my post regarding problems with economic modelling related to the assumptions included in them by 'do very little'-favouring economists. The rule to remember with all modelling is that models are the children of their creators. The outcome of a given model depends entirely on the assumptions used in its design. If one believes for instance, that climate change is really not likely to be a problem, humans have little agency to affect climate and/or that any constraint on progress is a bad outcome, it is very easy to take the best case scenario of the IPCC Report, apply a high discount rate and conclude that climate damage costs do not justify reforming the entire economic structure. Underestimating the potential real cost of climate change on this basis constitutes a statistical lie.

In dealing with economic costs from climate change, we are dealing with two levels of modelling, economic modelling and climate effect modelling. The magnitude of risk from climate change comes from the likely outcome of differing concentrations of carbon emissions in the atmosphere. Host of variables such as sea level rise, feedback mechanisms such as increased sunlight absorption, decreased carbon sink capability of vegetation, release of permafrost, ocean current variations can affect the ultimate outcome.

So the best approach to economic modelling on climate change would adopt a low discount rate and a medium to high range assessment of climate impacts. This would ensure that there was enough fat in calculations to take into account feedback mechanisms and policy could be developed on a prudent basis rather than the 'wishing and hoping' exercise that doing very little would entail.

It is patently obvious that we need to develop technology that involves less reliance on finite resources and more reliance on renewable energy. It is surprising that economists who believe in growth without end have not pushed this argument further and instead lead us down the path of using a finite supply of resources from an increasing number of inefficient sources such as shale oil and tar sands.

Friday, August 15, 2008

Hudson Recruitment goes Middlemarch

From the files of one very frustrated literature graduate...

Wednesday, August 13, 2008

Don't let the economists get too close

Over at The Interpreter, there's an interesting dance going on vis-a-vis the merits of raising the price on carbon by schemes such as emissions trading and carbon taxes. In the red corner we have the 'rapidly evolving' views of the Lowy Institute's Sam Roggeveen and in the blue corner, East Asia Forum's Peter Drysdale.

Roggeveen appears to have taken on board the work of Warwick McKibbin, who noted that many early adopters of Kyoto targets have failed (in some cases absymally) to meet them. The argument is further supported by the comments of Ted Norhaus, who argues that the UK and Germany only reduced their emissions because of pre-Kyoto reforms. In this light, Roggeveen offers up the Cato Institute's Jim Manzi's paper for comment highlighting the following conclusions:

In summary, then, the best available models indicate that 1) global warming is a problem that is expected to have only a limited impact on the world economy and 2) it is economically rational only to reduce slightly this marginal impact through global carbon taxes. Further, practical knowledge of the world indicates that 1) such a global carbon-tax regime would be very unlikely ever to be implemented, and 2) even if it were implemented, the theoretical benefits it might create would almost certainly be more than offset by the economic drag such a regime would produce.


What Roggeveen has come across is the great paradox of the collision of economic instruments to manage environmental problems. While the tools of economics such as trading schemes are designed to increase efficiency in achieving environmental outcomes at least cost, the assumptions that economists apply to the world come into conflict when dealing with issues such as the precautionary principle and intergenerational equity.

Much of the economic commentary on climate change discounts the effect of the problem for two simple reasons. Firstly, economists discount the future interests of individuals compared to the present generation based on the fact that there is a 100%probability that the living exist, whereas there is a less than 100% chance of subsequent generations. Second, economics assumes a continuing narrative of economic expansion and hence discounts current estimates of the value of today's paper money. The Stern Review was praised in some quarters for using a very low discount factor to cost future damage from climate change. However the Productivity Commission took issue with its figure of 1% discount per annum over a hundred years for precisely this reason. The cited economist, Ted Norhaus, prefers to discount future impacts by 6% per annum. The net result is that while Stern costs climate damage in 2100 at 37% current value, Norhaus costs it at 0.0295%.

Conversely, when estimating the cost of climate policy, the tendency of anti-action economists is to count the carbon cost imposed by trading, exaggerate it out to a projected level of equality with renewables based on years of underfunding, factor in extra costs such as lost land usage for renewable plant and completely discount a commensurate surge in the renewable industry. One does not even need to include the ramifications of lost productivity through the risk of interruption to the mythical baseload power supply to see the carbon reduction ledger firmly in debit.

The piece de resistance of this argument is the 'best available models' line. Economics demands certainty, but we have very little when it comes to climate behaviour. We can only postulate about the speed and magnitude of changes caused by retention of increased heat in the atmosphere. When these figures are fed into economic theories of discount and growth, we get a series of statistical lies which speak to the Bjorn Lomborg school of climate change being an overhyped waste of resources.

What Norhaus, McKibbin et al fail to note in their critique of Kyoto targets is that Kyoto should be judged versus business as usual, not whether targets were met courtesy of Thatcher's coal mine closures or the fall of communism. It is painfully obvious that investment follows return, and that means that creating markets through the introduction of trading systems and renewable energy targets allied with clean energy funding is the way to go. Governments need to understand their role is to promote good policy and secure their nation's welfare into the future and not rely on the prejudices of the past.

The merits of climate change action will depend on the scope of that action and its capacity to reduce emissions while promoting sustainable development. Thus developing programmes that can gradually build from a national to regional to global level, buttressed by agreements ensuring common but differentiated responsibility is far more desirable than a 'do nothing', rely on technology alone approach.

Monday, August 11, 2008

Encouraging SMEs to act on climate change

Peregrine apologises in advance for any viewers who may be offended by advertising...

I am in the process of starting up my boutique consultancy for small and medium businesses. It's called ClimateEasy and offers a range of cost effective services for business to prepare them better for the challenges of climate change.

Check it out here.

Wednesday, July 30, 2008

Perhaps these two gentlemen have explained climate change to Brendan Nelson

As part of its ongoing 'climate change is a myth perpetrated by green leftists' series, The Australian recently published the work of Messrs Evans and Jensen. Dr David Evans, a self-styled 'rocket scientist', is a former employee of the Australian Greenhouse Office. In hindsight, that appointment was probably as constructive as say, appointing Senor Fawkes pageboy for the House of Commons, for the good doctor appears to have had his head turned rather too swiftly for someone intimately involved in the climate modelling process. Dennis Jensen is one of the handful of Western Australian MPs who subscribe to the 'Howard as demigod' thesis, and are on the record as skeptical of the IPCC-inspired policies adopted by almost every social democratic party in the world.

Evans' piece, which has been dissected by Tim Lambert, boils down to three essential points. First, Evans does not give credence to the very modelling he was engaged to produce and hence will not accept any conclusions that either correlate observations with modelled outcomes, or predict the effect of various phenonmena on climate. This means Lambert's references to such visions of orbital forcing or carbon dioxide effects on temperature will fall on deaf ears.

On top of this rejection of modelling, Evans also rejects data showing temperature rises and adopts a very short-term view of climatic variability, suggesting the Earth is now cooling again. What makes me suspicious of such claims is the fact that climate skeptics do not suggest the Earth is reverting back to normal service but is in fact cooling (from the hottest part of the last several hundred years!).

Evans' third tenet is that the Vostok ice cores no longer support the C02-warming causal link as the warming follows the C02 by 800 years. This is widely accepted. He uses this fact as a stick to beat Al Gore as a misleading alarmist politician. Evans' problem lies in the second bit of data: for 800 years the temperature rises but C02 does not, then the two rise together for around 4200 years as the Earth emerges from an ice age. This supports the argument that increased sunlight raises temperature, gradually warms the earth and releases C02 and methane via melting permafrost. Has anyone spoken to Putin and Medvedev about the double-decker carbon sink they have in Siberia?

Basic common sense should cause someone with a scientific background to act cautiously and take appropriate precautions. Evans makes no mention of what will happen to the oceans absorbing ever larger concentrations of C02, nor the chemically proven fact that carbon dioxide is less soluble in warmer water. He ends his piece with the charge of 'criminal negligence and ideological stupidity' against the ALP. I would counter that by saying that if the ALP knew of both great environmental risk and the impending threat posed to our major coal and steel industries and did nothing to reposition the economy the charge would be made out.

Mr Jensen appears to be following Kipling's injunction to keep his head when all around him are losing theirs. His piece is basically a cry for nuclear power, regardless of climate change. It is also a cry for debate, although given those who seek that debate are largely disinterested in observations, conclusions, logical inferences and fair play, one does wonder what sort of debate the member for Tangney is advocating. Jensen believes that energy measures are tokenistic and that solar and wind are 'as yet unproved'. He implies climate advocates are today's flat-earthers, suggesting he subscribes to the Galileo Complex. Given most of Jensen's fellow-travellers would gladly locked Signor Galilei up for the term of his natural, it seems an odd piece of identification.

On the cost of emissions trading, Jensen states:

If all carbon in the stationary power sector were to have a $50-a-tonne price of carbon dioxide imposed (as is the case for the European price for CO2), it would mean a cost burden of $660 a year for every Australian, or more than $2500 per household, according to data I have received. These would not all be direct costs from the emissions-trading scheme, but also from higher prices of products that would flow through as a result of increased production costs. Those higher costs would make some businesses unviable, and they would have to close or move offshore.


Firstly, the Rudd Government's Green Paper indicates that $20 per tonne is the starting carbon price. Australia is years behind the EU and the $50 per tonne mark is unlikely to be reached for some years. Jensen makes no allowance for increased use of gas or an escalation in renewables (Rudd's 20% 2020 target seems to have escaped his notice). If we use the average power bill of $1020 per annum, we get a $163 rise at $20 a tonne for carbon. This means a $50 per tonne price adds $407.50 to your average bill. Assuming no renewable uptake, this means $252.50 is the price rise from stationary energy usage alone by business. All of which is great, except Jensen fails to include the compensation payable for price increases: remember, it's supposed to be the polluter pays, not the consumer. Also Jensen needs to answer, if these businesses are unviable because of associated emissions costs, is that because they cannot pass them onto the consumer? In which case, his $252.50 per household secondary emissions costing is surely higher.

Being a nuclear advocate, Jensen does not include the transport sector in his calculations, and the imposts created by high oil prices on freight costs. The biggest threat to business at present comes from oil prices and interest rates, and it will only be businesses that do not reform their practices early that will be vulnerable to the degree Jensen postulates. Given nuclear will require tremendous government support, surely that would feed into major stationary energy price rises of the very ilk Jensen criticises.

It is these true believers in business as usual (with nuclear variations) that Nelson's policy seeks to placate. Rather than offering certainty, the central demand of business, these dictates would add great uncertainty: whether any action would be taken at all under a Coalition Government and indeed the very viability of an export sector propped up by extractive carbon-intensive industry.

For the rest of us, we should learn some basic chemistry about carbon dioxide, keep a weather eye out to see if the birds are singing earlier this year and do what we can to make a difference, whether that be recycle, turn off the lights or push our politicians for action. Those are our best guides in sorting the climate fact from fiction.

Tuesday, July 22, 2008

Another global warming challenge

In the spirit of that fabled freedom of speech, Tim Dunlop has issued an invitation for any unpublished scientist whose (scientific) views are contrary to the global warming orthodoxy to send him a thousand word dissertation. Tree of Knowledge ups the ante to include explanations of why they differ from their fellow contrarians.

Global warming denial is both an inherently frustrating and fascinating phenomenon. Fascinating because of the psychological history, the experiences and influences that shape the views of the individuals that hold them. Frustrating for the standard political reasons. A level of intransigence by scientists and commentators either genuinely convinces politicians and the public the problem lacks urgency or provides a convenient excuse for inaction. It is not helpful in the modern massaged world of mass politics to be presented with the need to instigate a revolution across the economy and stimulate a domino-like consensus of opinion across both the developed and developing world.

It is understandable that conservatives in all walks of life, be they businessmen, unionists, politicians or commentators do not want to see the certainties of the modernity turned on their heads. Some see global warming belief as a triumph of faith over reason, others see it as an admission that the technologies of modernity cannot overcome the trials of nature. Both of these impulses have been criticial to the development of modern capitalism. Dependency on oil and baseload power are ciphers for an ideological conviction of humanity's inevitable progress. A narrative that despite the occasional conflagration has moved on apace since the medieval era.

The problem with this view is it ignores the inescapable facts that the oil reserves we rely on are finite and that it is simply unsustainable for the entire world's population to have the ecological footprint demanded by the modern western lifestyle. By definition, there are limits that constrain our access to resources. Hence in order to grow our way economically out of trouble, either we will have to find more arable and exploitable land or make our resource usage (across the whole gamut from food to metal production to energy itself) progressively more renewable. In short, while dealing with an exponential culture of achievement we will have to rediscover the cyclical resource use culture of our forebears.

As interesting in a 'angels dancing on a head of a pin' way as the global warming denial debate is, it does nothing to explain how proving the non-existence of anthropogenic global warming will solve humanity's forthcoming problems. It offers no solutions towards sustainable development and appears to buttress an ethic of land use and interaction which may be out of date and is certainly counterproductive.

Perhaps the greatest challenge for those poring over statistics, dissecting graphs and drawing conspiratorial conclusions is how are those intellectual endeavours going to secure the health, wealth and happiness of your grandchildren and their grandchildren. When the oil runs out and every nation from Guyana to Nepal demands a McDonalds on every street corner.