The title of a feature article by Paul Krugman in the forthcoming NY Times Magazine.

This piece is worth reading for a good general overview and history of climate economics issues.

He clarifies distinctions between cap and trade and Jim Hansen’s advocacy for a tax-based approach to emissions reductions.

Excerpts:

What about the case for an emissions tax rather than cap and trade? There’s no question that a straightforward tax would have many advantages over legislation like Waxman-Markey, which is full of exceptions and special situations. But that’s not really a useful comparison: of course an idealized emissions tax looks better than a cap-and-trade system that has already passed the House with all its attendant compromises. The question is whether the emissions tax that could actually be put in place is better than cap and trade. There is no reason to believe that it would be — indeed, there is no reason to believe that a broad-based emissions tax would make it through Congress.

To be fair, Hansen has made an interesting moral argument against cap and trade, one that’s much more sophisticated than the old view that it’s wrong to let polluters buy the right to pollute. What Hansen draws attention to is the fact that in a cap-and-trade world, acts of individual virtue do not contribute to social goals. If you choose to drive a hybrid car or buy a house with a small carbon footprint, all you are doing is freeing up emissions permits for someone else, which means that you have done nothing to reduce the threat of climate change. He has a point. But altruism cannot effectively deal with climate change. Any serious solution must rely mainly on creating a system that gives everyone a self-interested reason to produce fewer emissions. It’s a shame, but climate altruism must take a back seat to the task of getting such a system in place.

The bottom line, then, is that while climate change may be a vastly bigger problem than acid rain, the logic of how to respond to it is much the same. What we need are market incentives for reducing greenhouse-gas emissions — along with some direct controls over coal use — and cap and trade is a reasonable way to create those incentives.

But can we afford to do that? Equally important, can we afford not to?

Read on to see what he thinks about these questions…

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Photo by Wolfgang Staudt

It’s been easy for citizens of the developed, industrialized world to criticize China and India over their rapidly growing greenhouse gas emissions.  This was one of the major reasons why the Kyoto Protocol was never ratified in the United States.

As many have  pointed out, however, there are several flaws with this argument:

• The per-capita carbon emissions in China and India remain much lower (1/4 and 1/16, respectively) compared to the U.S..
• Perhaps more importantly, some of the carbon emission in these countries is caused by the production of export goods to fuel consumer demand in wealthy nations.  Thus, we are responsible for “shadow carbon emissions” that get attributed to developing nations.

Until today, there haven’t been very good estimates of these kinds of shadow emissions.

In the Early Edition of the Proceedings of the National Academy of Sciences, Steven Davies and Ken Caldeira examine how much CO₂ is embodied in the import and export of goods.¹

Their results are interesting (excerpts below—If you can get a copy of the article, check out figures 1 and 2; they are terrific visuals for this information.  Alas, copyrights don’t allow me to post them):

• Approximately 6.2 gigatonnes (Gt) of CO₂, 23% of all CO₂ emissions from fossil-fuel burning, were emitted during the production of goods that were ultimately consumed in a different country.
• Emissions imported to the United States exceed those of any other country or region, primarily embodied in machinery (91 Mt), electronics (77 Mt), motor vehicles and parts (75 Mt), chemical, rubber, and plastic products (52 Mt), unclassified manufactured products (52 Mt), wearing apparel (42 Mt), and intermediate goods (654 Mt).
• These imports are offset by considerable US exports of transport services (49 Mt CO₂), machinery (42 Mt), electronics (26 Mt), chemical, rubber, and plastics products (25 Mt), motor vehicles (22 Mt), and intermediate goods (263 Mt).
• [G]oods imported to Western Europe and Japan embody much more CO2 per US$ than do their exports, reflecting the import of energy-intensive products from elsewhere.
• The carbon intensity of imports to China, Russia, India, and the Middle East is consistently far less than that of their exports.
• China is by far the largest net exporter of emissions, followed by Russia, the Middle East, South Africa, Ukraine, and India and, to a lesser extent, Southeast Asia, Eastern Europe, and areas of South America.
• The primary net importers of emissions are the United States, Japan, the United Kingdom, Germany, France, and Italy. Although the overall mass of emissions is much less, the other countries of Western Europe are all net importers, as are New Zealand, Mexico, Singapore, and many areas of Africa and South America. Similarly, Canada, Australia, Indonesia, the Czech Republic, and Egypt are among the countries whose net exports of emissions are small.
• On a per-capita basis, net imports of emissions to the United States, Japan, and countries in Western Europe are disproportionately large, with each individual consumer associated with 2.4–10.3 tons of CO₂ emitted elsewhere.

Their conclusion:

Consumption-based accounting reveals that substantial CO₂ emissions are traded internationally and therefore not included in traditional production-based national emissions inventories. The net effect of trade is the export of emissions from China and other emerging markets to consumers in the United States, Japan, and Western Europe. In the large economies of Western Europe, net imported emissions are 20–50% of consumption emissions; the net imported emissions fall to 17.8% and 10.8% in Japan and the United States, respectively. In contrast, net exports represent 22.5% of emissions produced in China. Thus, to the extent that constraints on emissions in developing countries are the major impediment to effective international climate policy, allocating responsibility for some portion of these emissions to final consumers elsewhere may represent an opportunity for compromise.

¹Steven J. Davis and Ken Caldeira (2010). Consumption-based accounting of CO2 emissions PNAS : 10.1073/pnas.0906974107

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Photo Credit: http://www.flickr.com/photos/deks/ / CC BY-NC 2.0

Tom Friedman does just that in Sunday’s NY Times.

Graham’s reasons for taking climate change seriously: politics, jobs, and legacy.  His story is unusual and refreshing:

“I have been to enough college campuses to know if you are 30 or younger this climate issue is not a debate. It’s a value. These young people grew up with recycling and a sensitivity to the environment — and the world will be better off for it. They are not brainwashed. … From a Republican point of view, we should buy into it and embrace it and not belittle them. You can have a genuine debate about the science of climate change, but when you say that those who believe it are buying a hoax and are wacky people you are putting at risk your party’s future with younger people.”

….And for those Republicans who think this is only a loser, Senator Graham says think again: “What is our view of carbon as a party? Are we the party of carbon pollution forever in unlimited amounts? Pricing carbon is the key to energy independence, and the byproduct is that young people look at you differently.” Look at how he is received in colleges today. “Instead of being just one more short, white Republican over 50,” says Graham, “I am now semicool. There is an awareness by young people that I am doing something different.”

…in an op-ed piece in today’s NY Times.

Excerpts (links his):

[T]he scientific enterprise will never be completely free of mistakes. What is important is that the overwhelming consensus on global warming remains unchanged. It is also worth noting that the panel’s scientists — acting in good faith on the best information then available to them — probably underestimated the range of sea-level rise in this century, the speed with which the Arctic ice cap is disappearing and the speed with which some of the large glacial flows in Antarctica and Greenland are melting and racing to the sea.

Because these and other effects of global warming are distributed globally, they are difficult to identify and interpret in any particular location. For example, January was seen as unusually cold in much of the United States. Yet from a global perspective, it was the second-hottest January since surface temperatures were first measured 130 years ago.

Similarly, even though climate deniers have speciously argued for several years that there has been no warming in the last decade, scientists confirmed last month that the last 10 years were the hottest decade since modern records have been kept.

The heavy snowfalls this month have been used as fodder for ridicule by those who argue that global warming is a myth, yet scientists have long pointed out that warmer global temperatures have been increasing the rate of evaporation from the oceans, putting significantly more moisture into the atmosphere — thus causing heavier downfalls of both rain and snow in particular regions, including the Northeastern United States. Just as it’s important not to miss the forest for the trees, neither should we miss the climate for the snowstorm.

….The political paralysis that is now so painfully evident in Washington has thus far prevented action by the Senate — not only on climate and energy legislation, but also on health care reform, financial regulatory reform and a host of other pressing issues.

….Some analysts attribute the failure to an inherent flaw in the design of the chosen solution — arguing that a cap-and-trade approach is too unwieldy and difficult to put in place. Moreover, these critics add, the financial crisis that began in 2008 shook the world’s confidence in the use of any market-based solution.

But there are two big problems with this critique: First, there is no readily apparent alternative that would be any easier politically….Second, we should have no illusions about the difficulty and the time needed to convince the rest of the world to adopt a completely new approach.

Updates: There is a wide range of opinion on the IPCC these days:

• Union of Concerned Scientists weighs in on climate warming and the criticism of the IPCC.
• Roger Pielke, Jr. has been writing a lot about the IPCC recently (here, here, here)
• Joe Romm at Climate Progress

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The Guardian is running a story by Juliette Jowit suggesting that the total cost of externalities for the 3,000 largest companies in the world could be as much as $US 2.2 trillion in 2008.  As the story points out, that’s a lot:

• more than the economies of all but 7 nations
• about one third the value of the profits of these companies

Excerpts (links by Jowit):

Later this year, another huge UN study – dubbed the “Stern for nature” after the influential report on the economics of climate change by Sir Nicholas Stern – will attempt to put a price on such global environmental damage, and suggest ways to prevent it. The report, led by economist Pavan Sukhdev, is likely to argue for abolition of billions of dollars of subsidies to harmful industries like agriculture, energy and transport, tougher regulations and more taxes on companies that cause the damage.

“What we’re talking about is a completely new paradigm,” said Richard Mattison, Trucost’s chief operating officer and leader of the report team. “Externalities of this scale and nature pose a major risk to the global economy and markets are not fully aware of these risks, nor do they know how to deal with them.”

“It’s going to be a significant proportion of a lot of companies’ profit margins,” Mattison told the Guardian. “Whether they actually have to pay for these costs will be determined by the appetite for policy makers to enforce the ‘polluter pays’ principle. We should be seeking ways to fix the system, rather than waiting for the economy to adapt. Continued inefficient use of natural resources will cause significant impacts on [national economies] overall, and a massive problem for governments to fix.”

Another major concern is the risk that companies simply run out of resources they need to operate, said Andrea Moffat, of the US-based investor lobby group Ceres, whose members include more than 80 funds with assets worth more than US$8tn. An example was the estimated loss of 20,000 jobs and $1bn last year for agricultural companies because of water shortages in California, said Moffat.

• Use political tools to set emissions targets (e.g., 80% reduction by 2050);
• Invest heavily in green technology to drive green energy prices lower.  Only then will these technologies take hold. Carbon reductions are an important byproduct but not the main goal.

Of course these are not mutually exclusive, but they might as well be given the way they have played out on the political stage.

With a lot of people down on political solutions to deal with climate change, strong advocates of the latter approach may now gain the upper hand.  Folks like Shellenberger and Nordhaus have been arguing that green energy needs to be produced as quickly and cheaply as possible—forget all of the games with cap and trade or carbon taxes.   Tom Friedman has also argued the need for swift action on energy, while also endorsing political solutions like carbon taxes.

If you look for areas that are gaining or have the potential to gain traction, there seem to be two levers that may work:

• the link between fossil fuel dependency, climate change, economic stability, and national security;
• the fact that China is eating our lunch with respect to clean energy development.

Both of these general concerns have attracted Republican support for green energy and climate change mitigation, including Senator Lindsey Graham (R-SC).

This may be a signal of potential game changers and the clearest path forward that we’ve seen in awhile.

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Photo credit:  http://www.flickr.com/photos/worldeconomicforum/ / CC BY-SA 2.0

Happy New Year, everyone.  Sorry for the lag in posts, but there wasn’t a lot happening in the news or journals over the past week.

A few years ago, I saw a talk by Thomas Schelling (Nobel laureate in economics) who argued that we need to accelerate the economic development of poor countries so that they are able to cope with climate change.  This analysis is interesting, if not fraught with additional challenges, such as development in a carbon-based energy world hastening the very problem to which these nations are attempting to adapt.

In an article¹ in the Early Edition of the Proceedings of the National Academy of Sciences (open access), Anthony Patt and colleagues argued that the need for assistance by Least Developed Countries (LDCs) is dependent on vulnerability, which, in turn, depends on both exposure to climate change and how socioeconomic factors affect the sensitivity of LDCs to climate change.

To assess this hypothesis, they first examined how deaths caused by disasters (floods, droughts, and storms) varied across the level of development in several LDCs.  They used the UN Human Development Index—HDI, a composite metric of income, education, and life expectancy—as a proxy for development.

Here’s what they found…

As you might expect, they found that deaths declined with increased HDI, but interestingly, the relationship had a peak in the middle, suggesting that as the least-developed countries become more developed, they may actually exacerbate vulnerability to climate change at mid levels of HDI before eventually reducing vulnerability at high levels of HDI.

Next, they focused on Mozambique as a case study.  Using the model of deaths vs. HDI they developed for other countries, they projected how Mozambique’s HDI might change over the next 50 years.  To do this, they linked the HDI to different development scenarios outlined by the IPCC’s Special Report on Emissions Scenarios (SRES):

The A2 storyline describes high population and economic growth but low globalization, whereas the B1 storyline describes greater globalization
tied to improvements in environmental quality and sustainability, as well as lower population growth.

Under both scenarios, carbon increases in the atmosphere, but at different rates and to different degrees.  The authors assumed a linear increase in storms/disasters with rising temperatures, indicating that greater warming in the A2 scenario will lead to more disasters and more potential death than the B1 scenario where warming is not as great.

Following the B1 scenario caused the HDI to rise more quickly than the A1 scenario.  Simply put, society on a more-sustainable path (B1) leads to higher social welfare than under a more fossil-fuel intensive path with higher levels of human population (A2).

Similar to what they found by examining many countries, Mozambique will become more vulnerable to increased deaths as HDI rises over coming decades (by 2030-2040).  However, after 2050, vulnerability declined significantly in the B1 scenario, less so in the A2 scenario.

A few excerpts of their conclusions:

The results suggest that vulnerability may rise faster in the next two decades than in the three decades thereafter. Importantly, the overall need for adaptation measures will continue to rise… However,
assuming that their development paths fall somewhere close to the range bounded by the A2 and B1 scenarios, by the second quarter of the century LDCs will likely engage in a greater share of this adaptation autonomously, thereby reducing both their losses, and their need for financial assistance. This is especially the case if socio-economic conditions change in a manner close to that described in the B1 scenario.

….Looking beyond 2060 and the crossing of temperature thresholds such as 2 °C, it may well be that steadily rising climate impacts—such as sea level rise or the effects of cumulative changes on ecosystems—create problems that go well beyond the ability of any country, rich or poor, to adapt. Until that point, a primary argument for ramping up assistance slowly—namely, that adaptation needs can only increase as climate change continues—is incomplete, because it ignores the role that socio-economic development and the concurrent changes in adaptive capacity will have to play. Although there are important caveats to our results, they provide a first estimate of how vulnerability will unfold over the next 50 years, if one assumes, as do all of the SRES scenarios, that
incomes will continue to rise. They suggest that the urgency of efforts to reduce vulnerability, including the provision of international financial assistance, is high.

One thing the authors acknowledge is that nobody really has a good explanation for the humped relationship of HDI vs. deaths from disasters.  That’s an important part of their results, which suggests that the very poorest nations may experience more suffering in the initial steps of development.  Understanding this would make a great PhD in development economics.

¹Patt, A. et al. (in press) Estimating least-developed countries’ vulnerability to climate-related extreme events over the next 50 years. Proceedings of the National Academy of Sciences.

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In his blog, Paul Krugman responded with an article, Unhelpful Hansen, in which he takes readers through a basic primer of C taxes and cap and trade, arguing that they are basically the same and that Hansen is wrong for trashing what may end up being the best available approach.

Most of this is the kind of policy play-by-play that dominates daily blog traffic.  However, one of Krugman’s paragraphs caught my eye:

Things like this often happen when economists deal with physical scientists; the hard-science guys tend to assume that we’re witch doctors with nothing to tell them, so they can’t be bothered to listen at all to what the economists have to say, and the result is that they end up reinventing old errors in the belief that they’re deep insights. Most of the time not much harm is done. But this time is different.

Although this may not be an entirely fair criticism of Hansen (I have no idea what his formal training in economics is), it is interesting to see the implied call for better transdisciplinary understanding.   Social scientists have a responsibility to call out natural scientists for being naive when they wade around in social issues (and vice versa).  Although most of us are trained as disciplinarians, this is why it’s good to stretch ourselves and really understand perspectives and theory from fields with which we are not traditionally affiliated—as any good Environmental Studies program should do.  Most of the time it makes us better teachers and scholars.  And more humble about what we know and don’t know.

Specialization and expertise have their limitations, and, as Krugman points out, in some cases, they can be downright counterproductive.

Most of the focus these days is on how we can mitigate climate warming by achieving specific reductions targets like 20% by 2020 and 80% by 2050.  Economists from McGill University, Isabel Galiana and Christopher Greene, are going to stir up debate in their latest paper¹ in Nature by arguing that the current way of thinking about mitigating warming needs to be turned on its head.

Focusing on rapid emissions reductions, they say, may not be the best way to rapidly stabilize climate as cheaply as possible.  They even go as far as to say that climate can be stabilized at a 2 degree C warming even if most of the carbon reductions don’t happen until after 2050.

What’s the basis for their argument?  Technology-led approaches.  Let’s see what this means…

In the recent 2009 Copenhagen Consensus on Climate (an annual meeting of economists to discuss ways to solve the world’s pressing problems), they were part of a panel of economists that ranked 15 proposals to mitigate warming.  Their key findings included

• For $US 100 billion per year invested in global energy R&D for the rest of the century, we can stabilize emissions and minimize warming.
• A technology focus should replace the current focus on emissions reductions.
• This can happen with a low “fee” (tax) of $5/ton carbon, which would raise $150 billion annually.
• The carbon fee would be allowed to double every decade, sending a price forward signal that carbon is getting increasingly expensive and that the benefit of developing and deploying low-C technologies as soon as possible is a good idea.  By 2050, carbon would cost $40/ton.
• Isolate this revenue as much as possible from politicians, by, say, putting it in a trust fund managed by public and private sectors much in the way the Bill and Melinda Gates Foundation operates.
• Open competitions for these funds by companies, nations, and individuals to accelerate new technology development.  Others not in this competition can apply to use the funds to implement the successful technology developed from them.
• This approach facilitates development of breakthrough technology, allows technology to be scaled up, encourages demonstration projects, and helps diffuse technology spread.

Conventional emissions reduction approaches, they argue, have many pitfalls:

• They risk reducing emissions before the new technologies are fully developed and available, which could impact global GDP more than it should if we worried less about emissions reductions up front and did everything we could to push out new technology.
• They risk causing C prices to rise too rapidly, which could impact politically sensitive industries employing a lot of people, such as cement, steel, aluminum, and glass.
• Policies favoring high C prices (through cap and trade or high C taxes) don’t necessarily lead to new investment, especially if the revenue generated from these systems is used for anything other than energy R&D.

So back to the question in the title: What do radar, nuclear power, the Internet, and DNA have in common with technology to help us mitigate warming? Galiana, and Green argue

• they require(d) significant public investment to develop;
• the scientific knowledge needed to develop them is (was) not easy to patent, which challenged private investment;
• potential pay-offs are (were) decades away, which dissuades corporate boards focused mainly on short-term profit and stock prices.

¹Galiana, I. and C. Green (2009) Let the Technology Race Begin. Nature 462:570-571.

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If Al Gore and others are correct that we already have available the kinds of renewable energy technology needed to decarbonize the economy, why is it taking so long?  As we saw in an earlier post, part of the answer is carbon lock in resulting from our modern political economy.

Another way to examine this problem is to ask what motivates the investment community, particularly venture capitalists.  What kinds of policies will entice these folks to plow $ billions into clean energy, and which ones will keep them on the sidelines?

In the current issue^1,2 of Energy Policy, Mary Jean Buerer and Rolf Wuestenhagen examine this question by interviewing 60 senior fund managers around the world. They distinguished between policies that incentivized (1) “technology push”—forces like government funded research and development to increase the supply of renewable energy technology and (2) “technology pull”—things that increase the demand for green energy and the ability for businesses to provide it.

What did they find?

They asked the venture capital fund managers to rank the effectiveness of policies in terms of their ability to stimulate investment:  from 1 (very ineffective) to 5 (very effective).  Here’s what they found for each category, ranked from highest to lowest effectiveness.

I. Technology push options (average score in parenthesis):

Better than average:

• Government demonstration grants (3.75)
• Public R&D (3.39)
• Subsidies for manufacturing facilities (3.21)
• Investment subsidies (3.21)
• Private R&D
• Tax breaks for entrepreneurs (3.05)

Worse than average:

• Tax breaks for investors (2.75)
• Incubators (2.71)
• Government investment on private venture capital (2.67)
• Soft support measures (e.g., training entrepreneurs how to gain access to venture capital) (2.33)
• Government-run venture capital funds (2.29)

II. Technology pull options (average score in parenthesis):

Better than average:

• Feed-in tariffs (4.16) (explained more below)
• Reduction of fossil fuel subsidies (3.56)
• Technology performance standards (3.54)
• Residential and commercial tax credits (3.52)
• Renewable fuel standards (3.44)
• CO₂ trading (3.38)
• Public procurement (3.38)
• Production tax credit (3.35)
• CO₂ tax (3.35)
• Renewable portfolio standards (3.27)
• Renewable certificate trading (3.22)
• Clean development mechanism (3.00)

A feed-in tariff is when the government mandates that utility (e.g., electricity) companies purchase a fraction of their power as clean energy.  Because renewables have traditionally cost more than conventional fossil fuels (so-called above market rates), this means utilities are forced to pay a premium negotiated by the government. The utilities, in turn, pass this cost to all of their customers in the form of higher monthly bills.  The end result is that a utility must supply, say, 20-30% renewable energy, and electric bills go up a little bit for each customer.

This is the favorite choice of venture capitalists because it is well tested in Europe, and it gets renewable energy demand and supply up and running. And because the cost imposed on consumers is relatively benign, there’s not a lot of political backlash.

As you can see, the venture capitalists preferred technology pull approaches that spur demand for green energy.  All of these options were rated more effective than average and are therefore more likely to spur the flow of money needed to make it happen.  The most effective technology push policies were demonstration grants (e.g., proof of concept) and government investment in public research and development.

In contrast, they tended to dislike tax breaks for investors as well as government management of venture capital.

Also, when asked to rank what they viewed to be the main drivers spurring development of the clean energy industry, fund managers said this:

1. competitive advantage (most important)
2. security of energy supply
3. climate change
4. air pollution (least important)

Venture capitalists also stressed the importance of policy consistency—one of the largest hangups with how the U.S. government has dealt with renewable energy.  Renewable energy funding often lasts for a few years and then expires, requiring congressional reauthorization.  This makes renewable energy subject to the attack of fossil fuel industry, deficit hawks, and other political whims.  What’s needed is a strong signal from the federal government that funding will be significant and lasting for a decade or more.

Bottom line:

Climate communication makes another appearance: Note that the issue of economics is most salient to venture capitalists (duh), which helps with messaging and framing the problem.  You don’t pitch climate change to venture capitalists—you help them see that companies (or countries like China) who corner the market on new technologies stand to make a killing.  Like T. Boone Pickens, you appeal to energy security in America. And if you’re a politician, you develop a marketing strategy that includes the policy options above ranked more effective than average.

Related posts:

• Why don’t people engage climate change?  Problem 2: Communication
• Why don’t people engage climate change?  Problem 4: Political-economic context

¹Buerer and Wuestenhagen (2009) Which renewable energy policy is a venture capitalist’s best friend? Empirical evidence from a survey of international cleantech investors. Energy Policy 37: 4997-5006.

²Bowdoin people can access the article here.
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