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Archive for May, 2010

The European Commission has recently introduced a draft communication recommending the most ambitious greenhouse gas emission reduction targets in the world. The paper says “The extra economic effort needed to reach 30 per cent — while still substantial — has fallen”. The cost of emission cuts is made up of purchasing carbon credits (for affected industries) and/or switching to alternative sources of fuel or activity that emit less and/or reducing the scale of the economic activity that leads to emissions. The carbon credit price has fallen, greener alternatives are being supported more and economic activity has declined due to down turn.

The paper urges to take advantage of these falling costs and increase the target from its current level at 20 per cent to a target of 30 per cent reduction from 1990 levels [1].

Some news coverage of the announcement does not agree and focuses on the potential financial costs of such targets [2]. There are a couple of things wrong with this focus on financial costs alone:

1. Policy actions cannot be judged on their costs alone.

Policy actions should be judged on the balance of their costs AND benefits AND compared to the costs and benefits of inaction. Appropriate economic assessment provides information on what the costs and benefits of an action and inaction are, whom they affect and how they can be compared.

Indeed this is how everyone makes decisions…we never consider just the costs of our actions…For example, I could be extending my lunch break enjoying the sun, or working on a project and get paid for it right now instead of writing this post. But then writing the post gives me the opportunity to learn more and share my knowledge with some benefits to others too hopefully. And here I am writing away as I believe that the net benefit (benefit minus cost) of writing this post is greater than what I have to forgo.

Businesses, from whose point of view the Times Online article [2] is written, are not expected to consider environmental benefits of their actions. But this is precisely why public sector environmental policy is made: to take account not only costs to businesses but also benefits to current and future generations.

In fact, the Commission paper shows that the additional investment needed for increasing the target from 20 per cent to 30 per cent could be offset by air quality improvements alone, which would save the EU some €6.5-€10bn in healthcare bills and reduce the need to control other pollutants [1].

2. The key supporting argument those who focus on financial costs make is that climate change does not exist and/or emissions from human activities are not the cause.

I am not qualified to discuss the science. I work within the current policy which accepts that climate change is happening and emissions related to human activities are a major cause which the world economy has to deal with.

More importantly, most activities that will reduce greenhouse gas emissions will have other benefits like the above mentioned example of improving ambient air quality for our enjoyment and protection of biodiversity – so that the beauties in the nature photography slide show which is (perhaps ironically) placed next to the Times Online article referred to above live beyond the archives in future.

The failure of Copenhagen Summit in December showed once more how important international cooperation really is [3]. But someone has to take the lead and the European Commission deserves congratulations for their action.

[1] Euractiv.com – Brussels to argue for 30% CO2 reduction target

[2] The Times – EU sets toughest targets to fight global warming

[3] See Wagyū’s commentary on the video footage from the Summit.

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Today’s guest moo is from Wagyu, an ex-pasturite now working on a PhD at the Centre for Energy Policy and Economics at the Swiss Federal Institute of Technology. Wagyu comments on the recently leaked negotiations video from Copenhagen…

In order to deal with the global scale of climate change, some sort of international negotiation is inevitable. Up to now, I imagined these to be (at best) a meeting between high-level advisors from the major emitting countries, never reaching a concrete deal because of their lack of political leverage, or (at worse) a large assembly of countries’ representatives making endless statements with no chance of achieving anything concrete.

The video footage that leaked from one of the Copenhagen meeting rooms and made available online by the German newspaper ‘Der Spiegel’ shows something radically different. Here, the negotiating parties are the highest political level of several industrialized countries (including the UK, the US, France, Germany) and are trying to ‘convince’ representatives of China and India to commit to emission reduction targets.

We already knew that no significant progress was made in Copenhagen, but now we also know how the failure came about and why. It is not because of the lack of interest from industrialized countries: they all made their commander-in-chief available, with the ability to make binding commitments. The reason for the failure is based on an argument of ‘fairness’ made by the Chinese representative: the climate change issue was created all along the industrialization process, and the burden should not be borne by those that are entering their industrialization phase right now.

Since this argument has been on the table for a long time and is quite justified, I find it surprising that industrialized countries had no answer (except some sign of exasperation from Sarkozy, en français s’il vous plaît). It seems industrialized countries are simply not willing to accept responsibility for the current situation, and would like to live in a world where only future emissions matter.

If any progress is to be made in future negotiations, industrialized countries have to recognize that a great deal of their wealth was created by using the absorptive capacity of the atmosphere as a productive input. In other words, we are dealing with a stock pollutant, and negotiations have to account for cumulated past emissions. Developing countries are right to expect industrialized nations to take the first step and undertake (costly) actions. Moreover, if industrialized countries expect the other parties to commit to some effort, they should think hard on what they are willing to give up and ‘bribe’ countries like China and India.

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I attended a talk by Bill Easterly at the LSE last night titled “We don’t know how to solve global poverty and that’s a good thing”. I will be honest and say that I’d never heard of Bill Easterly prior to the event, but the title had sounded so intriguing I wanted to find out how Easterly could justify it.

Because there had been so much buzz about the event on Twitter, I made sure to get there about half an hour early, which was a good thing because by 6:15 the lecture theatre was packed, when the talk didn’t start until 6:30 (I bet all the other attending lecturers were a bit envious)!

Well I have to say that I am sure that no one attending was disappointed by Easterly. Easterly is a brilliant public speaker and he managed to give a talk that was informative, engaging, and humorous.  In the space of an hour and a bit he managed to convince us that:

1)     We don’t know to solve global poverty; and

2)     That’s a good thing.

On the first point, Easterly focused on how no one as yet had managed to find any policies or combination of policies that promised a good rate of growth for an economy. Part of the reason for this was that growth rates have a lot of noise, due to measurement errors, trade shocks, weather shocks, ash clouds, political instability, wars… so it would be very difficult to try and correlate any policies to economic growth.

Another thing he mentioned was the difficulty in trying to sort out causation from correlation (the problem is nicely shown by this comic), i.e. if two things are correlated, how do we sort out which caused which? Or indeed whether a third thing caused both?  But Easterly pointed out to us that we didn’t even have to worry about that quite yet… because we hadn’t even found any correlation between economic growth and anything else.

So after showing us a lot of failures in trying to find correlations between various policies and economic growth (including one he liked to call ‘I’ve just run 4 million regressions’), Easterly went on to tell us why it was a good thing that we don’t know how to solve global poverty.

This, by the way, was a bit of a misnomer as Easterly went on to say how it is a good thing because, in the past, we had attempted to force different ‘solutions’ onto various developing countries, and therefore being counterproductive instead of helpful and, in this way, implicitly supported autocracy in the aid system and in developing country governments (if you’d like more on this, do read Joe Stiglitz’s ‘Globalization and its discontents’).

Easterly then went back on his earlier point that no one had found any correlation between policies and growth, because he said that actually there was found to be a weak correlation between democracy (meaning not just equal votes but equality and rights for all) and growth. But he finished all this by again pointing to the difficulty between attributing causation: do rich people make democracy or does democracy make rich people?

So, to summarise, we don’t know how to solve global poverty, and in the past the various ‘solutions’ that the developed world had come up with and forced onto developing countries were failures at best and counterproductive at worse.  It is only a good thing that we don’t know how to solve global poverty because we have failed so miserably in our attempts in the past, but I would imagine that should we ever find a real solution to global poverty, that this would be a very great thing.

However I think underlying all of Easterly’s professions to be discussing economics, his main point was that democracy, as in equality and rights for all, is something that we should all strive to for all countries, and indeed, is the only correlation, although weak, we can find for economic growth. He criticised aid efforts made in previous decades that supported autocratic governments and made a very strong statement that we should all promise to: “Only recommend a system of government for other societies if you are also volunteering to live under that system yourself”.

I can live with that.

—-

Notes:

LSE has put up an mp3 of the talk here (45 mb). Podcasts of other LSE events are here.

LSE hosts free public talks practically every weeknight. The talks are very high calibre and are now even CPD accredited. Even if you can’t make talks, they aim to post podcasts and transcripts for each talk. For more information, click here.

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I went and chewed the cud with Britain’s top business herd (the Confederation of British Industry) last night, and witnessed the new Chancellor’s first major speech since taking office. He took the chance to make some expected attacks on the previous Government, but also announced some pointers for his emergency budget on 22nd June. Among these is the commitment to raise the threshold for paying income tax, a clear sign of the Lib-Dems’ influence on the coalition’s plans.

Osborne also tried to put down a strapline ‘Britain is open for business’. He is trying to capture his intentions to introduce more business- and investment- friendly policies (e.g. on corporation tax), but the audience may have felt a little confused because they weren’t aware we had shut.

The evening moved on to an after-dinner speech from Dame Ellen MacArthur, of global solo-yachting fame. She rightly gets respect for an incredible record, but having achieved her childhood dreams, she has found a new focus in life: sustainable development, or as she nicely phrased it ‘building a ship that sails forever’. This is probably not the traditional message for Britain’s business community, but it was refreshing to hear from such an inspiring source.

MacArthur’s views highlighted the lack of mention of the environment and resource use in the Chancellor’s speech – these topics still seem a long way down his priorities. So while he may be trying to reopen Britain for business, we should ask: ‘what sort of business?’ If it is business that seeks to make sustainable use of the environment, then I would wish the coalition a safe voyage.

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On April 20, 2010 an explosion aboard the Deepwater Horizon, a drilling rig, leased by British Petroleum, killed 11 people and set in motion a chain of events that would result in one of the most horrific environmental catastrophes of the past two decades.   Two days after the explosion, the rig sank 50 miles off the coast of Louisiana and crude oil began leaking from a broken pipe attached to a well approximately 1 mile below sea level.[1] The oil began flowing at a rate of 795,000 litres of crude per day and as of 9th May 2010 nearly 13.25 million litres had poured into the sea.[2]

Picture courtesy of Sky Truth

A comparison can be made to the 1989 incident off the coast of Alaska, where the Exxon Valdez oil tanker struck a reef and spilled nearly 50 million litres of crude oil into the Prince William Sound.[3] Studies show that 20 years after the spill, oil could still be found on the beaches and animals of this area.[4] Despite the huge clean-up effort much of the oil was never recovered. If the oil from the most recent disaster in the Gulf reaches the marshes, then the clean up would prove to be even more difficult.[5] In fact, there is already talk of this incident being more damaging and costly than Exxon Valdez.

As far as the effects associated with the oil that is now sitting on top of the water in the Gulf are concerned, marine mammals have severe trouble breathing in these areas, and any oil that gets in the plumage or fur will cause thermo-regulatory issues.  Not to mention the fact that crude oil is toxic and its ingestion has many physiological consequences.[6] In the longer term, the Exxon Valdez experience points to a decline in populations of vulnerable species for several decades. It was found that in the Prince William Sound, “harlequin duck survival was depressed for up to a decade after the spill and wildlife is still being exposed to oil 20 years later”.[7] CBC News looked at a number of species at risk in the Gulf of Mexico:

  • Sea turtles:  five species of sea turtles, four of which are classified as endangered;
  • Whales:  two species of large whales;
  • Dolphins:  nine species of Dolphins;
  • Shrimp and shellfish; and
  • Birds: Brown Pelican, beach-nesting terns and gulls, reddish Erget, and migratory songbirds: including warblers, orioles, buntings, flycatchers and swallows.

A pelican in the process of being rescued. Picture courtesy of News Hour

The timing of the spill has added another dimension to the tragedy, as it is peak nesting season for some sea turtles, peak spawning season for fish and shellfish, and the height of spring migration north for bird species.  Additionally, the Gulf of Mexico contains more than half the coastal wetlands in the lower 48 States of the US.[8] “These areas are vital as spawning grounds for many fish species and are home to other wildlife. More than 97 per cent of the commercial fish and shellfish caught in the gulf each year depend on estuaries and their wetlands at some point in their life cycle”.[9]

The cost of the spill could be as high as US$20 billion some experts argue – very early and likely incomplete assessment focusing mostly on the cost of clean up including the actions that are aimed to stop oil reaching the shore and cleaning up on the water and once on shore[10].

This amount is probably ‘nothing’ compared to what the total environmental cost of the spill could be. In addition to clean up, the total costs will include:

  • Lost revenue (now and into the future) from commercial fisheries and shellfisheries;
  • Lost revenue (now and into the future) from tourism;
  • Costs associated with reorganizing the economy in the affected areas if the spill is damaging enough to end these sectors for the foreseeable future; and
  • Loss of habitats and species, informal (unpaid for) recreation, lifestyles – as people care about environmental resources not only because they use them directly but also because they may want them to be available for others, for the benefit of future generations and for the sake of their existence. This group of motivations gives rise to the so-called ‘non-use’ values. In cases like this, there will be more people who hold non-use values for the habitats and species than there will be those who live in the area and will be affected directly by the spill.

Habitats and species affected have economic value, and hence their loss is a cost but there will be no data from the markets that will make it easy to estimate the cost.

In the case of the Exxon Valdez a large scale contingent valuation study was undertaken to assess the value of the damages caused by it.  Contingent valuation is a survey based ‘economic valuation’ method. Amongst other questions, it presents a scenario to a large and representative sample of the affected population. For example, in this context, the scenario will present the extent of the damage and ask respondents how much they are willing to pay to, say, avoid similar damage happening again, or their willingness to accept compensation for the damage[11].  The study conducted for the Exxon Valdez case was used in the compensation court case against the company in determining the level of damages to be paid.

Due to the wealth of biodiversity associated with the Gulf of Mexico, and President Obama’s statement yesterday that there will be no limit to the compensation that can be required, it is likely that a similar study will be needed to assess the total damage associated with this most recent disaster. Unfortunately.

Elsea

[1] New York Times (updated 10th May 2010)

[2] CBC News (10th May 2010)

[3] CBC News (updated 5th May 2010)

[4] CBC News interviewed Dan Esler, a research associate at the Centre for Wildlife Ecology at Simon Fraser University in British Columbia, who led an international research team that measured the prolonged exposure of animals to oil in this area CBC News (14th May 2010).

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] CBC News (3rd May 2010)

[9] Ibid.

[10] http://news.bbc.co.uk/1/hi/world/americas/8680460.stm

[11] The results of the Exxon Valdez study are reported in Carson et al. (2003) Contingent Valuation and Lost Passive Use:  Damages from the Exxon Valdez Oil Spill, Environmental and Resource Economics 25: 257–286.

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Amid the election headlines we spotted this article from the BBC on Monday highlighting the conclusions from the UN’s third Global Biodiversity Outlook (GBO-3), and it doesn’t look good.

In 2002 the world set the target of significantly curbing the global rate of biodiversity loss by this year, 2010. The report finds that none of the 21 subsidiary targets which were set at that time have been met on a global basis. This has led to an increasing number of species being listed by the International Union for the Conservation of Nature (IUCN) as ‘threatened’… i.e. they are very close to extinction.

Bill Jackson, the deputy director general of IUCN is quoted as saying “If the world made equivalent losses in share prices, there would be a rapid response and widespread panic”. This is a very valid point, and the article goes on to talk about a project called TEEB (The Economics of Ecosystems and Biodiversity)* which is attempting to value the various services provided to humans by nature – not because it wants to put a dollar sign on the environment, but because it wants to show how even a partial estimate of this value compares to financial figures. It also aims to show that not only do ecosystem services generate economic value but also that once these (at the moment free) services start disappearing, society will have to start spending money to replace them (for those that are possible to replace that is).  Significantly, the BBC article states “TEEB has already calculated the annual loss of forests at $2-5 trillion, dwarfing costs of the banking crisis”.

The message is clear: While, to some people, biodiversity loss might seem less of a threat to society than other seemingly more imminent problems, biodiversity loss is a real and significant threat that needs to be tackled now before the damages become even more significant than they currently are.

* Disclosure: Some of the cows in the pasture are involved in the TEEB project.

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Aldersgate Group event, 29th April, 2010: Priorities for the first 100 days of the new Government.

We may not know who will form the UK’s next Government, but we do know that they face environmental challenges that require urgent action. The latest report from the Aldersgate Group brings together research into the finance, skills and resource management policies required to enable the economy to make the transition to a low-carbon future. (“Accelerating the Transition”). Launching the report, a common theme was the need to simplify the range of regulations aimed to control carbon emissions in different sectors of the economy. These rules are devised to incentivise adaptation in each sector optimally, but how much do we know about the potential for adaptation?

Economics studies the costs and benefits of changes to human activity, but economists don’t get the chance to do real-life experiments to see how changes might work in practice. For example, we aren’t allowed to double the price of petrol for a week and see how people behave. The recent halting of UK air travel as a result of the Icelandic Ash Cloud provides us with a real experiment (unfortunately for the thousands of inconvenienced travellers) – how do people change behaviour when they can’t fly? Speaking at the Aldersgate Group event, a director at British Telecom said their video-conferencing business had risen by 35% during the travel suspension – evidence that substitutes for air travel can allow adaptation to low-carbon activities.  Last week’s closure of the air space in Scotland and Northern Ireland, and the weekend’s closure of some European air spaces have given travellers a further incentive to adopt alternative means of transport, or choices of destination.  It will be interesting to check whether the number of travellers choosing to fly to destinations within the UK and Europe decrease as a result.

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