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Posts Tagged ‘Climate Change Policy’

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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Imagine, it’s 2055, London is under water, Vegas under sand, Sydney on fire, the Taj Mahal is in ruins, the world has been devastated by climate change and you are the only human left alive to reflect on how we let the planet fall to ruin.

Would you describe such a state of affairs as a significant shift from your current situation or a relatively small disturbance along your life trend?

It may not be your notion of the future and may be difficult to imagine, or perhaps not if you have seen the film “The Age of Stupid”, but that doesn’t make the scenario improbable. According to climate scientist Dr Richard Betts, the total devastation of the world by 2055 due to a rise in temperature may not be as dramatic as in the Age of Stupid, but the film may not be as unreal as one would hope:

“The changes to our climate depicted by the Age of Stupid are certainly not science fiction. They are at the extreme end of the projections, but still plausible, and very real changes are already taking place in our environment” (Met Office 2009).

A study by the UK Met Office presented at the “4degrees and beyond” conference in Oxford this past September predicted a 4 °C by 2055 if emissions continued to rise.  The 130 climate researchers presented a 2055 world where:

  • Rise of 15 °C at the North Pole;
  • Arctic summers resembling those in California’s Napa Valley;
  • Sea levels rising by 1.4 metres[1];
  • The Amazon would be gone[2];
  • Monsoon waters needed for survival could stop[3];
  • Environmental refugees[4]; and
  • Fire down under[5].

More recently, the Global Carbon Project, a group of 31 scientists from seven countries led by Professor Corinne Le Quéré at the University of East Anglia and the British Antarctic Survey, used satellite and national inventory to track emissions data of carbon dioxide in their recently released report: Trends in the sources and sinks of carbon dioxide.  In an interview with the BBC news Professor Le Quéré warned that:

“If the agreement is too weak [in Copenhagen], or the commitments not respected, it is not 2.5 °C or 3 °C we will get: it’s 5 °C or 6 °C – that is the path we’re on” (BBC 17/11/09).

And now the Age of stupid is just plain horrifying.

Six Degrees of Separation

…between present average global temperatures at and those at the end of this century, would trigger a major transformation of our every aspect of life on earth.

This is the non-marginal revelation.

In economics we call these big changes:  “non-marginal shifts in the future growth path” (Dietz and others, 2008).  Technically speaking, the change is non-marginal in the sense that the losses resulting from climate change would be so profound that it would no longer be possible to assume that the global economy will grow at a certain rate in the future (Stern, 2007, pp.35).

Welfare economics is well suited to deal with marginal (small) changes, and one way to do this is by assuming these small changes do not affect the future overall.  To consider marginal events that occur in the distant, but fairly constant future, economists apply a discount rate to reflect the sentiment where people prefer to receive benefits now rather than later.  I would much rather you pay me £100 now rather than 10 years from now as I could invest this £100 and profit from the interest (so long as I did not invest in asset-backed securities).  Sometimes more importantly, as a mere mortal, I may not be around in 10 years’ time to reclaim £100. Society has a longer life span and more opportunities to generate extra income, so social discount rate used in economic analysis is smaller than that used for individuals.

With climate change, however, we are not thinking about a constant future 10 years away, we are thinking about a much more uncertain and distant future, which could be rather dissimilar to the world we know. To address this risk and uncertainty economists apply a declining social discount rate, which reduces the discounting of future over time. There are even discussions about using a zero discount rate (no discounting) to ensure that we have the same concerns about the environment in future as we do now (TEEB 2008).  But in a 6°C world, even zero discounting is not enough.  In a 6°C world we need to completely revise our expectations and how we make decisions.

The bottom line is that a 6°C rise in average global temperatures would shift the entire path of growth and consumption. This implies that climate policy analysis needs to move away from an approach that merely considers the possibility of a substantial shift towards one that actively anticipates its arrival.

This is the non-marginal revelation.  Will it hit home at Copenhagen?  Follow our blog to find out!

– Elsea

Dietz, S., Hepburn, C., and Hope, C.  (2008)  Discounting and Climate Change:  a non-marginal policy choice.

http://www2.toulouse.inra.fr/lerna/seminaires/Discounting_and_climate_change.pdf

Stern N. (2007) The Economics of Climate Change: The Stern Review Cambridge: Cambridge University Press.

http://www.hm-treasury.gov.uk/sternreview_index.htm

TEEB (2008) The Economics of Ecosystems and Biodiversity, European Communities.

http://www.teebweb.org/LinkClick.aspx?fileticket=5y_qRGJPOao%3d&tabid=1018&language=en-US


[1] Even an estimate of a 0.65-metre rise by 2100 would put 190m people/year at risk from floods (Stefan Rahmstorf, Jochen Hinkel).

 

[2] Deforestation and fires spreading from degraded land into pristine forest will conspire to destroy over 83% of the Amazon rainforest by 2100, and global warming would convert 30% of the Amazon into degraded shrub land and mixed woodland by 2100 Wolfgang Cramer).

[3] Anders Levermann simulations suggest that in a 4C world there will be a mix of extremely wet monsoon seasons and extremely dry ones. Worse, the fine aerosol particles released into the atmosphere by burning fossil fuels could put a complete stop to the monsoon rains in China and India.

[4] Lack of water, crop failure and rising sea levels could force up to 200 million people from their homes by 2050.  François Gemenne studied the impact of 23 recent environmental disasters and concluded that the people most vulnerable to a 4C rise are also least able to escape it.  Climate change is already forcing people to migrate from: Tuvalu, Kiribati, Papua New Guinea and the low-lying Carteret Islands, while water stress is forcing people in Mauritania, Sudan, Ghana and Kenya to migrate. Melting permafrost is pushing people out of Alaska and floods are forcing others out of the deltas in Bangladesh and Vietnam.

[5] A study of forest fires suggests the number of “extreme fire danger days” per year – from low humidity, strong winds and high temperature – will treble by 2050 David Karoly.

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On Monday the 26th October I had the pleasure of attending the launch of the Green Fiscal Reform Final Report [5]. The main objective of the Commission was to evaluate the social, environmental and economic implications of a substantial green tax shift such that 15-20% of UK tax revenues are generated from green taxes by 2020.

The good news about environmental taxes is:

  1. They work;
  2. They are efficient;
  3. They can raise stable revenues;
  4. The public will love them;
  5. They will help the UK meet the ’20 20’ by 2020 targets;
  6. They will stimulate low-carbon investment; and
  7. They will moderate the impact of high energy prices.

Of course any fiscal review must address competitiveness, international trade and distribution effects.  The report assures us that

“there is no theoretical reason why the tax shift of green fiscal reform should have negative effects on national competitiveness, provided that reductions in other business taxes compensate for increased environmental taxes on business” (p. 67).

The only sectors that are at risk are those that are high-intensity energy users exposed to international trade, and have low market power.   In the longer-run this is not such a problem for the UK because future world leaders will be those countries which maintain a comparative advantage in low-carbon industries.

The next issue relates to fuel poverty and low-income households about whom the report has a 7-point “Household Energy Efficiency Programme to achieve radical reductions in emissions without adverse effects on vulnerable households” (p. 77).

Economic modelling by Cambridge Econometrics shows that, under the plan, only 0.07% of GDP will be sacrificed for addressing climate change and creating jobs.

“Green Fiscal Reform emerges from this modelling exercise as a policy instrument that can reduce GHG emissions enough to meet the stretching government targets for 2020, with practically no cost to the economy overall, and with an increase in employment.  There is no other single policy that can do this” (p.49).

This notion of shifting the target of taxation away from labour (income taxes, or National Insurance contributions) or business enterprise (taxes on profits) towards taxes on pollution or the use of natural resources is not new to us environmental economists, but we also know very well that “green tax” very easily can become “stealth tax” during election time.  But if it really is as cheap and easy as this report says, then there is no reason why fiscal reform should turn into a “race to the bottom” and we can all look forward to a future where we drive to our wind powered homes in our electric cars and not expect it to cost us a dime.

Needless to say, I was definitely pumped as I walked home on Monday night.  This enthusiasm carried right through Tuesday until I attended an evening lecture at the LSE and promptly got a bucket of cold water chucked over my head.  That cold bucket of water, also known as Dieter Helm, begs environmental economists to stop dreaming, consider the “arithmetic” and engage in some expectations management.  Helm presented his 2008 work “Climate Change Policy:  why has so little been achieved?” at the Grantham Research Institute Public Lecture on the 27th of October.

What are the numbers in Helm’s arithmetic?  World population is expected to grow from 6 to 9 billion, economic growth has been constant at a rate of 2-3% per annum and there is no such thing as peak oil.  The resultant sum is the destruction of the rain forests, the pollution of the oceans and ever greater emissions into the atmosphere [1].

One of Helm’s major points at the lecture was:  “we are living beyond our environmental means: that our current consumption does not pay due allowance to the environmental costs”.

According to Helm, a closer examination of the macro and the micro costs suggests things may get a bit pricier than expected [2].

The macro costing is what he calls “crass Keynesianism” where all government spending creates growth and future consumption.  He points out that we are currently borrowing on the future both in terms of capital and in terms of the atmosphere and biodiversity, “we have been writing a large environmental mortgage on the consumption possibilities of future generations”.  Closing the gap will require a lower standard of living now to compensate for al the financial and the environmental borrowing.

At the micro level, Helm claims that arguing that costs are low is “argument by assumption”.  Low carbon technologies are not more expensive than conventional ones and that they will get cheaper are the assumptions that generate these low numbers.  How accurate are these assumptions?  Consider wind power- a good example as it is prolific in UK energy policy at the moment- it is more expensive than nuclear, there have been few advances in technology, the power generated is intermittent and the cost after a decade have only gone down a little [1].

The third factor that will drive up costs is related to the production approach to cutting carbon.  For example, Britain has reduced its greenhouse gases by 15% since 1990. However Helm and his colleagues have discovered that this carbon was merely “outsourced” and is actually matched by a 19% increase in carbon consumption over the same period [3].   Therefore, in order to actually reduce carbon, as opposed to just exporting it, we have to set up more expensive low-carbon technologies in countries like China as soon as possible, which will “require the developed countries to transfer considerable sums (considerably more than 1% GDP per annum) to countries like China so that they can increase their competitiveness and be low-carbon” [4].

Talking about raining on my parade…

If the politicians and commissioners tell everyone that dealing with climate change and digging out of the recession is going to be cheap, easy and effective and it turns out to be expensive, requires a major change in our lifestyle and possibly even causes a greater slowdown in growth, then people are not going to be impressed.

But if we warn everyone that it will require a major change in their lifestyle and could have a huge impact on GDP then we might see some supporters jumping off the band wagon and the whole thing could get dragged down in a big political brawl.

As Helm says, “We economists need to grow up about GDP” and in his speech Lord Adair Turner, Chairman of the Financial Services Authority and the Committee on Climate Change, pointed out that GDP is irrelevant to happiness.  If only we could all agree that human welfare is the overriding objective, and then at least we could move in a new direction.

– Elsea

Notes and References

[1] Helm (2008) Climate-change policy: why has so little been achieved? http://www.dieterhelm.co.uk/sites/default/files/Why_so_little_08.pdf

[2] These comments were taken from my personal notes of Helm’s 2009 Grantham Institute Lecture presenting his 2008 paper, which were supplemented by his 2009 Tanner Lecture.  Both the paper and the presentation are available, respectively, via the following links on his website:  “Climate Change Policy:  why so little has been achieved?” and “Environmental Challenges in a warming world – Consumption, costs and responsibility”.

[3] Helm et al. (2007) Too Good to Be True:  The UK’s Climate Change record, http://www.dieterhelm.co.uk/sites/default/files/Carbon_record_2007.pdf

[4] Helm (2009) Environmental challenges in a warming world -Consumption, costs and responsibilities, 2009 Tanner Lecture, http://www.dieterhelm.co.uk/sites/default/files/Tanner_Feb09.pdf

[5]  Green Fiscal Commission (2009) The Case for Green Fiscal Reform: Final Report of the UK Green Fiscal Commission, http://www.greenfiscalcommission.org.uk/images/uploads/GFC_FinalReport.pdf

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