Tackling Climate Change: A bargain

Tackling Climate Change: A bargain
May 4, 2007 -- The Economist (Subscription)

About 0.1% of world GDP would do it

The Intergovernmental Panel on Climate Change (IPCC), set up under the auspices of the United Nations to establish a consensus on global warming and what to do about it, has now completed its fourth assessment report. The first two parts, published earlier this year, about the science and the impacts of climate change, were designed to spread gloom. Change was happening, they said; it was mankind’s fault; and it was going to be damaging. The third part, released on Friday May 4th in Bangkok, is about mitigating climate change, and is designed to spread hope. Just as mankind caused the problem, it says, so mankind can stop it—and at a reasonable cost.

In some areas of economic activity, emissions could be cut with no cost to consumers or taxpayers. The heating and lighting systems of many buildings, for instance, are startlingly inefficient. Improving this would cut both emissions and bills. Economists are troubled by this, for it implies that people and businesses are not maximising their economic self-interest; yet the low take-up of energy-efficient lightbulbs suggests this is indeed the case. Governments are therefore beginning to tighten regulations on the energy efficiency of buildings, and to talk about, for instance, banning incandescent lightbulbs. The IPCC reckons that such measures could cut 30% of projected emissions from this sector at no extra cost.

Transport is trickier, because car ownership is rocketing and the demand for fuel is fairly inelastic. If people want to drive they are going to drive, unless governments jack up petrol prices to levels that are politically unacceptable. So for emissions to fall in the transport sector, new technologies, such as more efficient biofuels or electric cars, are needed. Given a big R&D effort in this sector, there is a good chance that those will be forthcoming.

Similarly, in power generation, there is scope for cutting emissions. The cost of renewable energy, such as wind and solar, has been falling. Nuclear generating technology has improved. Carbon capture and storage, which involves taking the carbon dioxide (or C02) out of power station flue gases and injecting it back into the earth, is also a possibility, though that technology is at an early stage.

Technological solutions to climate change, then, are available. But most of those on offer in the power and transport sectors cost more than fossil-fuel generated energy. Fortunately, economics comes to the rescue. Burning fossil fuels imposes a cost to society that is not reflected in their price. Economics says that it should be; and if it were, the price of using fossil fuels would rise in relation to the price of using renewable energy.

Unfortunately, the social cost of carbon is hard to calculate. Plenty of economists have tried, with unconvincing results. It requires estimating the impact of climate change on economic growth, which involves too many unknowns. So the IPCC report starts from the other end. Rather than trying to work out the social cost of carbon, and letting it feed through to reduce greenhouse-gas concentrations in the atmosphere, it starts from a manageable greenhouse-gas concentration and works backwards to a carbon price. Conveniently, it says the “social cost of carbon is at least comparable to, and possibly higher than carbon prices for even the most stringent scenarios assessed by the IPCC”.

And what is the right price? The report says that to stabilise greenhouse-gas concentrations at 550 parts per million (a level most scientists think safeish) would require a price of $20-50 per tonne of carbon by 2020-30. That is along the lines of the carbon price established the European Emissions-Trading Scheme, which varied between $6 and $40 in 2005-06. It has not bankrupted the European economy so far. The IPCC’s economic models reckon, on average, that if the world adopted such a price the global economy would be 1.3% smaller than it otherwise would have been by 2050; or, put another way, global economic growth would be 0.1% a year lower than it otherwise would have been.

The world would barely notice such figures; so one might think that climate change can be easily sorted. The problem, of course, is that the numbers work only if they are applied globally. If a few countries—even a few big countries—adopt a carbon price, it will make little difference. All the world’s big emitters need to do it. Which brings the world straight back to the problem that sank Kyoto. No country alone can make a difference, and it is in every country’s interest to ensure that everybody else bears the burden. As the IPCC report convincingly argues, the technology and the economics of this problem are easily soluble. It is the politics that is so difficult.

Make Green Pay, Davos 2007: CNBC video

Make Green Pay is a discussion coordinated by CNBC at this years Davos meetings. The link provided will take you to the video for the entire program. The topics discussed are as follows:

MOTION 1: Nuclear energy and cleaner coal are the only workable alternatives to oil

James Rogers, President and Chief Executive Officer of Duke Energy argues for the motion that nuclear energy and cleaner coal are the only workable alternatives to oil. Today’s needs can only be met with today’s resources he says. Mr Rogers sees emission-free nuclear and advanced-coal technologies as the energy workhorses for the short-to medium term. Vinod Khosla, Founder and Partner of Khosla Ventures argues against the motion puts forward the case against the motion. He focuses on the hidden costs of nuclear and coal – the clean-up costs. Factor those in, he insists, and clean renewables start to look a whole lot more competitive.



MOTION 2: Markets are superior to regulation in leading corporations towards greener operations

In the board rooms and in the corridors of power there is increasing acknowledgement that the way in which we consume energy is damaging the earth. For most corporations though, changing attitudes are yet to translate into radically different practices. Reverend Nicholas Frances, Chief Executive Officer of Easy Being Green, puts forward the case for motion 2; that markets are the most effective influence on company behaviour. He says that a government’s ability to regulate will always lag the entrepreneur’s talent to innovate. Professor Daniel Esty, Hill House Professor at Yale University puts forward an opposing view. Professor Esty argues that business must be motivated to find solutions. Regulation, he points out, gives business the stability required for the risks associated with policy changes.



MOTION 3: A global carbon tax would do more harm than good

Professor Jose Goldemberg of Sao Paulo University reminds us that the developing world is unlikely agree to sacrifice economic development for an environmental agenda. He not only says that a global tax would do more harm than good but that to even aim for one would be unrealistic. Sir Nicholas Stern of the UK treasury and author of the Stern review stands against the motion. According to Sir Nicholas, companies must face with the full social cost of their actions and that, in economic terms, a common global carbon price would be the most efficient way of achieving this.

Davos Notes: Considering the Real Costs of Our Energy Economy

Davos Notes: Considering the Real Costs of Our Energy Economy
January 24, 2007 -- By Lester R. Brown, The Huffington Post

Davos 2007 has officially begun. For me, the highlight of the first day consisted of a series of debates, part of CNBC's Make Green Pay panel.

As is true with most events at the World Economic Forum, the topics of each of the event's three panels were controversial, and the speakers on both sides were thoughtful and impressive.

I participated as a featured speaker discussing, among other things, the viability of nuclear energy as a solution to our world's current fossil-fuel-based energy economy.

As concerns over climate change have mounted in recent years, nuclear energy has been touted as a viable alternative to our current dependency on carbon-intensive energy sources.

The truth however, is that when the real costs of nuclear power are considered, the energy source is quickly taken out of the running.

In fact, on a level playing field with no taxpayer subsidies, nuclear power is dead. If utilities pay the full costs of nuclear waste disposal, of insurance against an accident, and of decommissioning plants that are worn out, the cost of nuclear power will far exceed that of other promising alternatives.

This notion of real costs is something that our fossil-fuel-based throwaway economy does not take into account.

In my recent book, Plan B 2.0 - which is downloadable, free of charge from the Earth Policy Institute's website - I urge considering the real costs of all products as we develop the necessary 21st century, Plan B, economy.

What does "real costs" mean? It means including the total ecological and health costs of products on their prices.

Throughout most of recorded history, the indirect costs of economic activity were so small that they were rarely an issue and, even then, only at the local level. But with the sevenfold global economic expansion since 1950, the failure to address these market shortcomings and the irrational economic distortions they create could be fatal.

Our modern economic prosperity is achieved in part by running up ecological deficits, costs that do not show up on the books, but costs that someone will eventually pay.

The burning of coal, for example, results in increased costs for society as citizens are affected by breathing polluted air, as well as for governments that will be forced to deal with the effects of climate change.

Instead of pushing these costs - which will have to be paid at some point - off until the future, it makes more sense to incorporate them at the front end. The method for this, increasing taxes on environmentally damaging goods while decreasing income taxes, is a model I discuss at length in Plan B 2.0.

It is also something that has been proposed by ecologists and economists alike, and, when real costs are included in the pricing of goods, it is the greener, alternative energy sources - like wind, solar, and geothermal - that emerge as the cheapest, most viable solutions to our current model.

The notion of taxing products to include their entire cost to society is something that is being put into practice here in the United States in the form of tobacco taxes.

A study by the Centers for Disease Control and Prevention (CDC) in the United States calculated the social costs of smoking cigarettes at $7.18 per pack. As a result, prices for cigarettes in many states across the country are rising toward this number - a result of increased taxes intended to offset the social costs.

When it comes to energy, the International Center for Technology Assessment has done a detailed analysis, entitled "The Real Price of Gasoline." The group calculates several indirect costs, including oil industry tax breaks, oil supply protection costs, oil industry subsidies, and health care costs of treating auto exhaust-related respiratory illnesses. The total of these indirect costs centers around $9 per gallon, somewhat higher than the social cost of smoking a pack of cigarettes. Add this external or social cost to the roughly $2 per gallon average price of gasoline in the United States in early 2005, and gas would cost $11 a gallon (this does not include projected costs of climate change). These costs are real; someone bears them.

Now that these costs have been calculated, they can be used to restructure taxes--lowering income taxes and offsetting this with a rise in gasoline taxes.

This practice is a necessary component to any energy economy we consider as a solution to our current fossil-fuel-based energy economy.

That being said, nuclear energy with the real costs of insurance, construction, security and waste disposal becomes among the most expensive form of energy in the world.

Conversely, green, clean, renewable energy becomes the most viable; the costs we see today are very close to the real costs we would endure as most of these energy sources have few if any hidden effects on society.

It's time we start being honest about what various energy options actually cost in the long run. It was the failure to do so in the first place that brought us to this juncture in human history, where we must decide on our future. If we are willing to acknowledge the full effects of our actions - including total societal costs of our energy choices - then we may yet avert some of the impending consequences of global climate change.

For more Davos coverage -- including news, videos, and blog posts -- visit the Davos Conversation site.

Social Discount Rate For Climate Change

Recalculating the Costs of Global Climate Change
December 14, 2006 -- By Hal Varian, NY Times, via Economist's View

The Stern Review on the Economics of Climate Change ... became front-page news because of its striking conclusion that we should immediately invest 1 percent of ... global gross domestic product ... to reduce the impact of global warming. The British report warned that failing to do so could risk future economic damages equivalent to a reduction of up to 20 percent in global G.D.P.

These figures are substantially higher than earlier estimates.., and environmental economists have studied the 700-page report to try to figure out why the numbers are so large.

Recently two noted economists, William D. Nordhaus of Yale and Sir Partha Dasgupta of the University of Cambridge, have written critiques of the Stern report that try to solve this puzzle. ... The two critiques emphasize different but related aspects of the Stern Review’s economic model.

Mr. Nordhaus’s major concern is with the Stern Review’s choice of the “social rate of time discount,” the rate used to compare the well-being of future generations to the well-being of those alive today. ... Some very intelligent people have argued that giving future generations less weight than the current generation is “ethically indefensible.” Other equally intelligent people have argued that weighting generations equally leads to paradoxical and even nonsensical results.

The Stern Review sides with those who believe in a low discount rate, arguing that the only ethical reason to discount future generations is that they might not be there at all ... The report assumes that the probability of extinction is 0.1 percent per year. For all intents and purposes, this implies a social rate of discount that is effectively zero, implying almost equal weight to all generations.

The report ... also makes an extreme choice when specifying the relationship between consumption and welfare. These choices together imply that a 1 percent reduction in consumption today is desirable if it leads to slightly more than 1 percent increase in the consumption of some future generation, even though, in the model, future generations will be much wealthier than the current generation.

Given these assumptions it is easy to see where the large numbers come from. Unchecked global warming will certainly make future generations worse off to some degree. If we add up these losses over all time using a zero social discount rate, we get a large sum: a dollar a year over a million years is a million dollars.

Mr. Nordhaus examines a model of climate change that is similar to the one used in the Stern Review but with a 3 percent social discount rate that slowly declines to 1 percent in 300 years rather than the 0.1 percent discount rate used in the Stern Review. In his model, the welfare of future generations is given less weight than the current generation’s welfare. He finds that preventive measures like a tax on carbon emissions are certainly required. But they are of a much smaller magnitude than those recommended in the report. ...

So, should the social discount rate be 0.1 percent, as Sir Nicholas Stern, who led the study, would have it, or 3 percent as Mr. Nordhaus prefers? There is no definitive answer to this question because it is inherently an ethical judgment that requires comparing the well-being of different people: those alive today and those alive in 50 or 100 years.

Still, we may at least ask for consistency... Forget about global warming and consider the much simpler problem of economic growth. How much should we save today to bequeath to future generations if we really believed in a 0.1 percent social discount rate and the other assumptions built into the Stern model? The answer, according to Sir Partha’s calculation, is that we should invest 97.5 percent of what we produce today to increase the standard of living of future generations.

Sir Partha’s stripped-down model leaves out uncertainty, technological change and population growth, but even so, such a high savings rate is totally implausible.

It is even more implausible given that future generations will be much richer than those now living. According to Mr. Nordhaus, the assumptions used in the Stern Review imply that per capita yearly consumption in 2200 will be $94,000 as compared with $7,000 today. So, is it really ethical to transfer wealth from someone making $7,000 a year to someone making $94,000 a year?

As these examples illustrate, the choice of an appropriate policy toward global warming depends heavily on how one weighs the costs and benefits it imposes on different generations. ...