CBC “As it Happens”
interviewed the Nobel prize winners for
Economy on October 8, 2018. The headline
online read: “Nobel Prize-winning economist
says carbon taxes are the solution to climate
change”.
I thought I should read more
about it. I found a March 2014 review of a
book by William Nordhaus, one of the two
Nobel prizewinners in 2018, that attracted
my attention - The
Climate Casino: Risk, Uncertainty, and
Economics for a Warming World, Yale
University Press, 2013. The review by Robert
Repetto of the International Institute for
Sustainable Development, IISD, March 2014, gave a tight encouraging
summary:
“The book’s main messages are
that humans are almost certainly causing
climate changes unprecedented during the
emergence of civilization, mainly by burning
fossil fuels, and that the resultant warming
is a major threat to societies and the
natural world. Climate dynamics may well
involve thresholds and tipping points that,
if triggered, could make changes
self-reinforcing and irreversible. The only
genuine solution is to reduce emissions by
changing the practices of billions of
people, businesses and governments around
the world. This can best be done through
market mechanisms, specifically by creating
an economic penalty or “price” for carbon
emissions, either through a carbon tax or a
cap-and-trade regime that limits the use of
carbon fuels through tradable permits.
Either option would be efficient, but the
latter affords greater certainty over future
emissions. In adopting targets under either
policy, governments should consider both
potential damages and the costs of reducing
emissions, but should be willing to pay an
insurance premium to stay on the safe side.
Relative safety may be unattainable unless
all countries with significant emissions
cooperate to reduce them. If they do,
climate change can be limited at a
relatively low cost, less than one or two
per cent of total income; however, waiting
to act would be extremely costly.”
Repetto went on
to add a few critical concerns but sums up
his review with a firm nod to the Nordhaus
book:
“Because of the important
issues that it explores and the informative,
even-handed way in which it does so, The
Climate Casino is highly recommended.
People of all backgrounds can learn much
from the book about one of the most
important issues we face, and Professor
Nordhaus should be highly commended for
writing it.”
I had to read
it!
First, know that this is a
readable and clearly set out book. It is
measured and thoughtful. Statements made follow a series
of logical developments with data and charts
as evidence. Uncertainties
are acknowledged and faced. CO2 is a side
product, a pollutant or an “externality” in
the language of economics, from burning
fossil fuel. It is the key player in global
warming and related climate change. Given
the serious risks of “tipping points” that
lead to major irreversible shifts in
climate, the wisest strategy is to avoid
them. The simplest response is to have the
person producing CO2 pay increasingly for
using the fossil fuel that “pollutes” on a
“polluter pays” model. Then pollution comes
with a cost. And the cost is egalitarian –
everyone who produces CO2 pays accordingly.
Nordhaus shows in this book that involving
everyone – and every country - that produces
CO2 is important for meeting a temperature
rise limit of 2 degrees.
But I get ahead of myself.
The book develops its policy advice in an
orderly manner. It leads from the science,
to the models, to the economics, to the
costs of various approaches, to getting a
realistic cap on carbon emissions, and to
policies national and international.
Part I of the book explains
the origins of climate change. The first
three chapters of the book introduce climate
change. It is an economic problem because
almost everything we do, the economy,
releases CO2 into the atmosphere. Yet CO2 is
a pollution produced externally to the
economics – it is not paid for in the costs
of doing business. Stopping CO2 totally is
not feasible. But limiting the global
temperature increase to a safe level is
feasible if everyone pulls back on CO2
production. Nordhaus explains some models
used to simulate temperature rise, the
uncertainties in them, and also the near
unanimity in the direction of the
projections. Concentrations of CO2 are
rising. Temperature is rising.
Chapter 4 projects climate changes and
temperature rises over coming years. The
bottom line: without policies to slow it,
the average temperature in 2100 will be at
least 3½°C higher
than 1900. Sea level can rise up to 2 ft.
Hurricanes can get more serious.
Chapter 5 talks about
“tipping points” as a theory and about some
dangerous tipping points in practice. Once
the temperature allows arctic ice to go,
more heat is absorbed from the sun, leading
to a jump in temperature. When a certain
point is reached, ocean currents can change
direction so that northern Europe is no
longer warmed by a warm Gulf Stream ocean
current. He warns there will be surprises –
and nasty ones given the possibilities.
In Part II, the book moves to
look at impacts of global warming, noting
lesser impacts in “managed systems”, where
humans have experience of control, than in
“unmanaged systems.” Chapters 6 & 7 look
at changes to agriculture and health - these
can be manageable. Then chapter 9 looks at
impacts of rising sea levels, ocean
acidification, and hurricane
intensification. These are hard to manage.
Chapter 10 considers impacts that are much
harder to manage - damage to wildlife and to
natural ecosystems. Nordhaus notes that the
Copenhagen 2 degree limit is too low when
one considers the high costs of attaining
it. But at the same time this limit is too
high if the earth has already crossed the
threshold of some dangerous tipping points.
The book dates from 2013. By 2018, and an international
conference later, a figure of 1.5 degrees
was indeed considered a wiser target. Yet a
cost analysis shows this to be difficult to
attain.
Part
III examines strategies and costs for
slowing climate change. Chapter 13 explores
adaptation and geoengineering. Adaptation is
learning to live with climate change.
However dealing with needed crop changes or
frequent clean up from floods is not without
costs. Some of the most important dangers
are unmanageable. Ocean carbonization and
ecosystem losses cannot just be adapted to.
Geoengineering supposes that technology
could slow or stop climate change. In
theory, this could be done at a modest cost,
but the effectiveness is questionable and
the side effects unknown. Nordhaus likens
geoengineering to “salvage” therapy in
medicine – something used only when all else
fails. Reducing the levels of CO2 production
is preferable.
Chapter
14 examines options for “mitigation” to
reduce CO2 production. Some are now
available and there are some hoped-for
future technologies. Slowing the economy
will work now, but is painful. Cutting
energy use will work now, but people resist
changes to their lifestyle, and their car
travel is a big component of CO2 production.
Some mitigation like sequestering CO2 from
the atmosphere is viable on a small scale at
a particular factory but it is questionable
given the large scale removal that is
needed. Mitigation can reduce CO2 production
if well managed.
Chapter
15 turns to the costs of slowing climate
change I found this new and helpful.
Nordhaus takes the three ways of mitigating
CO2 production worth considering: curb our
carbon intensive activities; produce goods
and services with low carbon technologies or
fuels; sequester or take out CO2 produced by
the combustion. The book moves to the cost –
the dollars per ton of CO2 removed.
Substituting natural gas for coal in
producing electricity is vastly cheaper
overall for CO2 removal than buying a more
efficient refrigerator. Natural gas
conversion costs $20 per ton of CO2 removed
compared with $167 per ton removed by
producing a more efficient refrigerator. In
any example of mitigation, a higher cost
needs to be paid up front. You pay more for
a hybrid car that mitigates by using less
gasoline. How much more it costs depends on
the effectiveness of the policy used. Given
the cost, policies to reduce CO2 emissions
need incentives. Removing coal is king when
it comes to reducing CO2 emissions. Yet the
favourite policies of governments regulate,
or not, the energy efficiency of cars and
appliances.
I
add that changing electricity generation
from coal was done in Ontario with a
significant drop in CO2 production, but with
a cost on electricity bills and a political
cost. In Ontario, the current largest growth
of CO2 production is in the transportation
sector – the cars and trucks driven and the
aircraft flying. See my article August 2018.
Ultimately
the
issue is paying the cost for the entire
economy of reducing CO2 production. Nordhaus
points out that because the costs of
mitigating CO2 production are potentially
big, it is important to craft inexpensive
ways to reduce emissions and to ensure
societies use them – as in the example of
natural gas for electricity. The science of
costing is relevant for policy makers.
There
is an intriguing comparison of “bottom up”
costing for CO2 reduction and “top down”
costing. Bottom
up is the typical engineer’s approach –
considering costs of using technologies on
hand for reducing CO2 production in each
sector of the economy – cars, blast
furnaces, power plants. Top down costing
relates the cost of CO2 reduction to prices
and incomes. The methods lead to similar
results – a cost of $100 billion for the US
to reduce CO2 by 30% from 2012 to 2025. This
similarity comes despite negative cost
technologies found in the early years using
the engineering approach. Nordhaus notes
that bottom up works with a finite group of
sectors, whereas the top down approach is
economy wide.
Nordhaus
moves
on to map the global cost – yes the cost for
the whole world economy - of meeting
temperature targets with full global
participation and then with 50% global
participation. With full global
participation and 100% efficient policies
the 2% target from the earlier Copenhagen
world meeting is plausible. With 50% global
participation, achieving that target becomes
virtually impossible because the percentage
of global income needed rises so much more
steeply. For example, if India does not
participate, other countries would have to
pay more to reach the global target – and so
on. The costs rise if the policies are
inefficient. No country is efficient.
Policies are a mixture of regulations,
energy taxes and green subsidies. For
example, US car fuel efficiency standards
are inefficient in that they only apply to
new cars. Unless all countries participate
and policies are more efficient the goal of
2% will be hard. But Nordhaus urges that the
world does not give up – striving for those
policies, realistic goals and social
mechanisms to encourage economic efficiency
and high participation.
Part
III about costing ends with Chapter 16. This
is about the economics of discounting – how
to take into account the fact that over time
the costs shrink. Comparing how much paid
now is worth thirty years ahead is what he
explains. And he sets his own 4% discounting
against others used and shows the various
results. There is no lack of acknowledged
uncertainties here. But Nordhaus’ arguments
and explanations are the best economic
science of the moment. That deserves to be
heard.
Part
IV turns to examine the policies and
institutions that fit with this science that
has been set out and explained. Chapter 17
sets out the historical basis and the
scientific basis for the 2% - and now 1.5% -
temperature target. Chapter 18 explains the
case for doing a cost to benefit analysis
for policy and institution creation.
With
the scene set, Chapter 19 is entitled “The
Central Role of Carbon Taxes.”
Nordhaus
shows
the effect of various carbon prices and
their effects on carbon intensive goods
versus non-intensive goods. Following his
evidence he sums up:
“They
[carbon prices] provide strong incentives to
reduce emissions; they do so in an
evenhanded way; they affect all aspects of
the economy from production to innovation;
and they economize on the information that
people need to make efficient decisions” -
page 227.
Chapter
20 examines national policies and a
cap-and-trade versus straight carbon tax. Both
strategies require legislation. The
similarities and differences are shown and
hybrids of the two are considered. For
Nordhaus, the straight carbon tax ends as
his best option with cap-and-trade for those
with high tax aversion. Chapter 21 examines
the international policies and institutions,
beginning with a short summary of
international agreements.
Chapter
22 entitled “Balance Sheet on Alternative
Approaches” examines a range of alternatives
to carbon tax. Some of these are useful and
complementary. Things such as tax breaks for
green technologies are considered. Finally,
he notes the syndrome that people tend to
buy a cheaper car in the face of evidence
that over a modest time a slightly more
costly car will save more by use of less
gasoline. That is part of the policy
challenge. In the end Nordhaus is clear
that: “The shortcomings of relying primarily
on regulations are severe …” (page 272) He
sums up the evidence with three reasons.
First, reducing emissions would require
dealing with technologies over the entire
economy and governments do not have enough
information to do this. Secondly,
“Regulatory policies alone cannot come close
to solving the global warming problem by
themselves.” And “Third, regulations can be
very costly or even counterproductive if
they are not carefully designed.” He adds:
“Given the unfavourable record of the
regulatory approach, you might wonder why
governments universally employ regulatory
tools when they have been shown to be so
inefficient. Studies have shown again and
again that gasoline taxes are more efficient
than regulations in reducing gasoline
consumption or in reducing CO2 emissions
from transportation.” So regulations would
be needed at every level – to regulate car,
truck and airline emissions and a ship’s
emissions and a refrigerator’s emissions and
a home gas furnace’s emissions. On the other
hand, a carbon tax is just universal.
Chapter
23 turns from the challenge of achieving a
limit of 2 degrees in temperature rise and
faces the fact that the underlying CO2
problem stems from an economy based on
burning fossil fuels. What new technologies
might replace fossil fuels and how would
people be persuaded to move over to them.
Wind, solar and geothermal are available.
The issue is their cost competitiveness.
Wind is 50% more expensive and with limited
capacity in the US. Geothermal is marginally
more than wind. Solar is twice as costly as
wind. Nuclear is a matter of public concern
over risks. Carbon sequestering is
undeveloped and is costly. There follows a
sobering reflection on the science of
technological changes of the scale required
and about the process of innovation and the
challenge of that. Chapter 24 reflects on
the critics of the science of climate
change. History reminds us that there can be
a consensus but it might need to be changed
if new evidence emerges. However, we go with
the best we have at the time. Chapter 25
examines public opinion. Most people are
poorly informed about public affairs. People
rely on the experts of the groups they
adhere to. The issue has an entrenched
political partisan dimension despite
Nordhaus’ argument that a carbon tax should
bridge the US partisan divide.
Finally
chapter 26 looks at obstacles to climate
change policies – like self-interest in an
economic area, such as creating unemployed
coal miners in the USA. I
find it sobering. In Canada, Alberta cannot
imagine a future without shipping tar sands
oil down pipelines.