Wednesday, April 9, 2014

William Nordhaus, The Climate Casino (2013)

As previous posts both adumbrate and expose, the human brain does not always successfully sort fact from fiction, but most of the time it does do a pretty good job in comprehending reality even if that reality is derived from imagination or rests upon probabilities.  The brain --- and I am thinking of the human brain in particular, but it could be any animal brain to an extent --- deals with uncertainties.  It deals with uncertainties in degrees.  Another remarkable feature of the human brain is its ability to anticipate and to project in the future, what Jeff Hawkins called "intelligence" where the brain recognizes a predictable set of patterns, even in the face of uncertainties.  (See November 16, 2013 post).

But even if the capacity of the human brain is remarkably successful in comprehending reality and anticipating the future, there are subjects like predicting future climate change and the inherent uncertainty in predicting the risk of harm that will occur if average global temperature rises just a few degrees over the current temperature that challenge the ability of some, if not many, to call their predictive capacity remarkable.  A previous post discussed this issue.  (See August 12, 2012 post).  William Nordhaus has spent a career studying and getting his intellect around the risk, uncertainty, and  economics of climate change.  The Climate Casino is Nordhaus' reflection on this subject; it is also a wake up call for those who can't or do not want to spend time looking into the future with the benefit of a very substantial amount of data that indicates a significant risk of harm from an average global temperature rise of just a few degrees due to increased emissions of greenhouse gases.  I will discuss this last thought in a moment.

What is not uncertain for economist Nordhaus and like-minded scientists who study climate change is that average global temperature has been increasing since the beginning of the 20th century, which is roughly aligned with the beginning of the industrial era.  What is also uncertain for Nordhaus and others is that humans are already witnessing impacts from the average global temperature increase.  Finally what is not uncertain for Nordhaus and like-minded scientists who study climate change is that human behavior resulting in increased emissions of greenhouse gases is responsible for the slow, but steady rise of average global temperatures.

What is uncertain is the potential future impacts from rising average global tempertures, not the science that connects greenhouse gas emissions to a slow steady rise of average global temperatures.  Nordhaus would be the first to admit how difficult it is to estimate and measure the impacts of climate change.  He would also be the first to admit about the uncertainty associated with future rate of increased greenhouse gas emissions. For example, "Estimating the impacts of climate change on health is yet another difficult task.  It requires estimate of climate change by region and year.  Then it requires estimates of the impacts of changing climate conditions on health for different diseases.  This is challenging because the changes take place well into the future in a world where incomes, medical technologies, and health status are evolving rapidly."  With respect to estimating the impacts of sea level rise in the future, Nordhaus notes, "One of the challenges is that sea-level rise is so delayed.  While the impacts on farming and health might arrive relatively quickly, the seal level rise slowly for many centuries because of the thermal inertia in oceans and the long delays in melting the giant ice sheets.  The long delays pose special challenges because they require envisioning the shape of our landscape and societies deep into the future and taking steps today that will produce the most benefits well beyond the present century."  With respect to the prospect for species loss in the future attributable to increased average global temperatures, there are no reliable estimates of the risk of extinction for different species; some climatic ranges will shift, and some areas might grown, so the number of species for growing ranges would be predicted to increase rather than decline, and they do not account for species loss by habitat destruction, overuse, overfishing, overhunting, and pollution that would occur even in the absence of climate change.  And even if you could devise a means of estimating the risk of species loss due to climate change, there are no reliable techniques for valuing ecosystem and species loss.

"What should we conclude at the end of this review of the impacts of future climate change?" Nordhaus asks.  "The first point to emphasize is the difficulty of estimating impacts.  They combine the uncertainties of emissions projects and climate models.  Even if we overlook the uncertainties about future climate change, the reactions of human and other living systems to these changes are very poorly understood.  In part, reactions of social systems are hard to forecast because they are so complex.  In addition, humans increasingly manage their own environment, so that a small investment in adaptation may offset the impact of climate change on human societies.  Moreover, climate changes are almost certain to occur in the context of technologies and economic structures that will differ vastly from those today.*** However, we must look through the fuzzy telescope as best we can.  A second conclusion involves the estimate economic impacts of climate change from sectors that we can reliably measure, particularly for high income countries of today or the future.  The estimates here are that economic impacts from climate change will be small relative to the likely overall changes in economic activity over the next half century to century. *** The loss in income would represent approximately one year's growth for most countries spread over several decades [because] managed systems are surprisingly resilient to climate changes if they have the time and resources to adapt.  *** A third major conclusion is that the most damaging impacts of climate change --- in unmanaged and unmanageable human and natural systems --- lie well outside the conventional marketplace:  sea-level risk, hurricane intensification, ocean acidification, and loss of biodiversity*** unstable ice sheets and reversing ocean currents."

There are mitigation strategies for slowing climate change by reducing emissions.  They are not inexpensive, and because they are not inexpensive Nordhaus recognizes that humans cannot implement these mitigation strategies in one fell swoop.  But since we understand all too well where carbon dioxide emissions come from, it is not that difficult to say that if humans had the will to mitigate climate change by reducing carbon emissions we know what to do.  Here are some basic facts:
  • Petroleum emits 0.9 tons of carbon dioxide per $1000 of fuel
  • Natural gas emits 2 tons of carbon dioxide per $1000 of fuel
  • Coal emits 11 tons of carbon dioxide per $1000 of fuel
Coal has about six times more carbon dioxide emissions per dollar of cost than natural gas and about 12 times ore than petroleum.  "Coal is a very inexpensive fuel per unit of energy but has the disadvantage that much carbon dioxide is released per dollar of expenditure."  This suggests that the "most economical way to reduce energy emissions is to reduce coal use."  When looking at emissions from the household perspective (2008 data), automotive travel is the biggest contributor to carbon dioxide emissions at 7.9 tons per household (15.2% of emissions).  Space heating contributes less than half that amount at 3.2 tons per household (6.2% of emissions); air conditioning represents 1.3 tons per household (2.5% of emissions).  Lighting use, electronics and computers are much smaller contributors.  With the exception of automotive, the contribution of heating, air conditioning and other appliances to carbon dioxide emissions could be substantially impacted by changing the fuel mix to generate electricity by significantly reducing coal in favor of natural gas or renewables.  "The results of detailed energy models suggest an important and troubling conclusion.  The favorite policies of most countries today are energy efficiency regulations such as those for automobiles and appliances like refrigerators.  However, such regulations will not touch the area where reductions are most economical --- electricity generation from coal.  While energy-efficiency regulation may be popular, reducing coal use meets with ferocious opposition from coal regions and their hired guns.  But careful analyses show that coal is king when it comes to reducing carbon dioxide emissions.***Significant reductions in emissions cannot be done quickly, or cheaply with today's technologies or those that are ready for large-scale deployment.***Yet we need to ensure that societies rely on the least expensive approaches.  Returning to our examples of refrigerators versus electricity generation, we was a cost difference of a factor of almost ten."

None of this is lost on the Obama Administration.  There is a reason that the Administration has been pursuing an "all of the above" strategy for energy:  they are driving down natural gas prices by increasing supply, which incentivizes industry and utilities to shift their fuel mix from high carbon intensity coal to lower carbon intensity natural gas.  It is working.  Additionally, the Administration is providing limited subsidies (loan guarantees) for nuclear fuel even in the face of criticism that nuclear electricity generation plants are not cost effective:  nuclear energy substitutes for coal as a fuel.  The Administration's support for renewable energy fits a similar model.

Economists recognize that there is a more efficient way to reduce carbon emissions than all these regulatory strategies:  Tax carbon emissions or cap emissions and create a market mechanism to allow emitters to pay for permission to emit above the caps.  Either way puts a price on carbon that makes it more expensive to emit carbon dioxide.  When that happens, economic actors will reduce their emissions.  Despite all the anti-tax rhetoric about a carbon tax, a carbon tax has the serious potential to enable taxing authorities to reduce a number of other taxes in a significant way.  A carbon tax does not have to be accretive to overall taxation.  There are some in the US Congress who have actually looked at a carbon tax this way.  The advantage for establishing a market in allowances (cap and trade) is that it ensures that emissions are used in the most productive manner, explains Nordhaus.  This type of system has been very successful in reducing sulfur dioxide emissions.

Nordhaus is right: "reducing coal use meets with ferocious opposition from coal regions and their hired guns."  It also meets with deceptive rhetoric from those who simply oppose government intervention in the economy.  A recent article in today's Washington Post headlined "Study: Fox News botches climate-change coverage" identifying misleading portrayals of climate science, which, by Nordhaus' view, is the least controversial piece in this discussion.  It's the economics stupid; it's not the science.  The hard part is to avoid over-estimating the costs of the damage that may ensue, as Nordhaus highlights in The Carbon Casino, so we don't make the mistake of establishing and pursuing mitigation strategies that cost more than we need to pay over the long-run.  But that is almost what is happening when we favor imposing more stringent regulations on refrigerators and light bulbs as a carbon mitigation strategy instead of raising the price of carbon, which is more efficient and will motivate economic actors to pursue their own self-interest in a way consistent with the public interest.  The other hard part is overcoming our reluctance to demonize coal, and pursue more economically efficient carbon pricing policies to reduce carbon emissions such as carbon taxes or cap and trade.  This is politics.  Our inability to do that is what is referred to as the tragedy of the commons: where acting in self-interest is not the same as the collective or global interest.  (See August 12, 2012 post).  This is exactly when governments can help.

I am reminded in this political debate of  Michael Shermer's analysis of various biases that form our beliefs, and sometimes false beliefs, about things we do not really understand:  "the anchoring bias: relying too heavily on one reference anchor or piece of information when making decisions; the authority bias: valuing the opinions of an authority, especially in the evaluation of something we know little about;  in-group bias, in which we place more value on the beliefs of those whom we perceive to be fellow members of our group and less on the beliefs of those from different groups. This is a result of our evolved tribal brains leading us not only to place such value judgment on beliefs but also to demonize and dismiss them as nonsense or evil, or both."  Our modern tribal groups are political parties, religious groups, and other social clubs like those on some television talking heads groups.  (See September 12, 2011 and  June 12, 2011 posts).

No comments:

Post a Comment