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The sustainability of improving living standards

April 12th, 2008

I’ve been a bit under the weather for the last few days, so I thought I’d get my readers to do the work for me. Here’s a piece I’ve been working on for the Fin. Comments and criticism much appreciated.

With the major scientific issues in the debate over global warming having been resolved, attention has turned to the economics of climate change, and of stabilising the global climate. The release of the Stern Review in the United Kingdom had a powerful effect on public debate in Australia, an effect that has been amplified by the recent Interim report of the Garnaut review.

Part of the impact was due to the dire assessments of the impacts of uncontrolled growth in emissions of greenhouse gases put forward by Stern and even more vigorously by Garnaut. Coming from mainstream economists with a longstanding reputation for cautious policy judgement, these assessments had a greater impact, for many, than similar assessments offered by environmentalists or climate scientists.

But Stern’s pessimism on the consequences of doing nothing was matched by striking optimism regarding the cost and feasibility of stabilising global climate. Stern concluded that the global climate could be stabilised with CO2-equivalent concentrations of 550 ppm.

Garnaut drew on more recent evidence suggesting both that the safe level of emissions was 450 ppm than Stern’s 550 ppm and that rapid growth in China and India had already made the achievement of such a target difficult, if not impossible, in the absence of immediate action. Still Garnaut endorsed Stern’s main point – the cost of stabilisation is far less than the cost of doing nothing.

The Stern review was highly controversial. Naturally, we heard from the noisy, but rapidly shrinking, group who still deny the reality of the problem. But the main dissent from economists focused on Stern’s estimates of the cost of doing nothing, and particularly on his treatment of the way in which future benefits and costs should be discounted.

This debate is exceptionally complex and unlikely to be resolved soon. Fortunately, at least for anyone willing to accept the view that massive changes in the climate are a bad idea regardless of the economic number attached to them, the problems of discounting can safely be left to the professionals to sort out.

There was much less criticism of Stern’s estimates of the cost of stabilising climate. Even the sharpest critics among economists only suggested that Stern’s estimates were at the optimistic end of a plausible range, the upper end of which might be 5 per cent of national income, or around two years of economic growth. That is, by 2050, a low-carbon economy might have the material living standards that would otherwise have been reached by 2048.

This is, on the face of it, a striking conclusion. We use energy in nearly everything we do, and it is, therefore, widely assumed that a modern economy is dependent on cheap energy. Yet mainstream economists, even those most critical of Kyoto, are unanimous in the view that we could greatly reduce emissions of carbon dioxide while continuing to improve living standards at much the same rate as in the past.

Stern’s optimistic view that CO2 emissions could be greatly reduced without a corresponding reduction in living standards is rejected by critics beginning from two diametrically opposed positions. Although deeply hostile to each other, the two groups find some surprising common ground.

The first group are ‘Deep Green’ pessimists who see the end of consumer capitalism as both inevitable and desirable. At least since the reports of the Club of Rome in the 1970s, members of this group have argued that continued economic growth is inherently unsustainable.

The Club of Rome initially focused on claims that stocks of various mineral and energy resources would be exhausted within a few decades, but claims of this kind have been refuted by experience. Most mineral resources have actually become cheaper. Even in cases where prices have risen, the economic impact has been marginal, relative to the long-run trend of increasing income.

As a result, most Deep Greens now focus on limits to the capacity of the natural environment to support continued growth and assimilate waste products like CO2. Their central claim is that economic growth depends critically on the use of the natural environment as a dump for our waste products.

The Deep Green position is qualitatively different from that of participants in the climate change debate, including James Hansen and Stephen Schneider, who argue that we are already close to, or perhaps past, a point where our activities will critically damage the environment. From the point of view of these commentators, damage to the environment is the result of mistaken (but hopefully reversible) policy choices, rather than an inherent consequence of modern civilisation.

The mirror image of Deep Green pessimism is that of the ‘Dark Brown’ pessimists who say that we should do nothing to stabilise the climate because to do so will wreck our standards of living. Dark Brown commentators from thinktanks like the Competitive Enterprise Institute warn of ruinous economic consequences even from modest first steps such as the implementation of the Kyoto Protocol.

As with the Deep Greens, the Dark Brown school must be distinguished from participants in the climate change debate, such as William Nordhaus, who recognise the necessity for large scale mitigation, but argue for a slower pace of initial action than is implied by the Kyoto process. Whatever the merits of this argument, it is driven by beliefs about relative costs and benefits, rather than an assumed fundamental conflict between the environment and the economy.

The track record of Dark Brown pessimists is no better than that of the Club of Rome. Time after time, Dark Browns have opposed environmental improvements as too costly, repeatedly overestimating the costs and underestimating the benefits. The debate over CFCs and the ozone layer provides a good example, since it was one of the first issues to be addressed on a global scale. The doomsayers repeatedly attacked both the science behind the ban on CFCs and the economics of the policy, claiming it would cause massive economic damage. In reality, even without taking account of health benefits, it seems likely that the CFC ban yielded positive net economic benefits.

Although many Dark Browns got their start in the CFC debate, there have been some new entrants to the camp. For example, Bjorn Lomborg has taken up the mantle of the late Julian Simon, and has repackaged Simon’s arguments with some success. More importantly in political terms, the Dark Browns are now part of the Republican party establishment in a way that wasn’t true when Richard Nixon signed the Clean Air Act. But the central arguments haven’t changed.

Both groups engage in a fair bit of wishful thinking about their position, the Greens arguing that we’ll all be happier in the long run and the Browns claiming that the environmental problems will solve themselves if we ignore them. But these opposing claims are secondary to the shared presumption that economic growth depends on increasing exploitation of the natural environment and, in particular, on the burning of fossil fuels.

Underlying both Deep Green and Dark Brown positions is a fundamental misunderstanding of the nature of economic progress and of economic activity in a modern society. The concept of economic growth is so firmly embedded in our thinking that we forget it is just a metaphor. The idea of growth implies physical expansion, and any process of physical expansion has limits.

Economists have contributed to these misunderstandings. The traditional model of economic growth is based on the accumulation of capital equipment, capable of converting an ever-larger volume of natural resources into physical products for human consumption.

Such a model leads naturally to the conclusion that economic growth cannot continue indefinitely. The classical economists of the 19th century, beginning with Malthus, were the first to reach this conclusion, which they phrased in terms of the idea of diminishing returns.

The central idea is most easily seen in terms of agriculture. The output of a given piece of land can be improved by the application of fertiliser, the use of more agricultural machinery and more labour. Initially the returns to such increases in intensity may be high. But the total amount that can be grown on a given plot of land is bounded, and eventually the benefit of additional inputs must decline or become negative.

The same logic applies in industrial capitalism. Productivity can be increased by investing in more capital equipment but if the labour force is held fixed, the marginal return to additional investment must eventually decline. It was this that led the classical economists (notably including Marx) to talk about the inevitability of a declining rate of profit.

Long experience of sustained growth suggested that the classical economists were missing something. For a long time, growth models made to fit by adding an unexplained and exogenous source of growth called technological change, but this was always unsatisfactory. Technological change is itself the product of economic activity, and therefore subject to the same logic of diminishing returns. Something was missing.

It has gradually been recognised that the missing ingredient was information, embodied in technological improvements and in the minds of skilled and educated workers. Unlike physical inputs to production, information is not subject to diminishing returns. Once some piece of information, such as an improved way of producing a good or service is discovered, it can be used and reused indefinitely. Use by one person does not diminish its availability to others. This insight led to the development of ‘endogenous growth theory’ as opposed to older theories based on exogenous technological change.

The public-good nature of information explains how economic progress can continue without additional resources. Most obviously, improvements in information technology allow more and faster communication which in turn allows for yet more technological improvements. There is no apparent indication of diminishing marginal returns in this field; if anything the opposite.

Once we think in terms of information, it is natural to think of economic progress, not as more of everything, but as a set of qualitative improvements. This can be seen most obviously by looking at the areas of the economy that are growing most rapidly, such as health services. Health care is all about information, from the skill and expertise of doctors and nurses to the information embodied in medicines and medical equipment. By contrast, the physical resources required are modest. Even a hugely expensive piece of medical equipment, such as a CT scanner, embodies less raw materials, and consumes less energy, than a passenger car.

As new treatments become available, and as the knowledge available to medical workers expands, the capacity of the health sector to improve both the length of life and the quality of life increases. The length of human life may be bounded, but there is no reason to suppose that limits to growth in the quantity and quality of health services are going to be reached any time soon.

What is true of health care is even more true of education, the information service par excellence. The only limit to our capacity for education is the capacity of the human mind. And while some have always argued that this limit is tight enough to mean that more extensive education should be confined to an elite few, supposedly tight limits have regularly been broken. High school completion, once a rarity except for the upper-middle class is now the norm, and the numbers going on to universities have increased massively. Yet the demand for educated workers, and for more skilled workers of all kinds, continues to outpace the supply.

That is, there is nothing in the nature of economic progress in a modern society that inherently requires increased volumes of physical output. Most growth will occur in activities where information is the crucial factor. But, it might still be argued, energy is essential to all of these activities, so a reduction in energy use must bring growth to a halt. The first part of this claim is true, but the second is false.

The most common problem with ‘energy fundamentalism’ is the failure to understand prices. As Hayek observed long ago prices are the critical information generated by a market economy. Even where explicit prices are not present, for example within firms and government agencies, increasing scarcity of any resource is reflected in higher implicit prices.

Before considering the future, we can use prices to assess the importance of energy in existing activity and the extent to which our current prosperity depends on readily available supplies of cheap energy. At current prices, primary energy accounts for less than 5 per cent of total expenditure. An immediate implication is that a doubling of the cost of primary energy, arising from a switch to more expensive sources of energy could cost no more than an additional 5 per cent.

But this is a substantial overestimate. An increase in the cost of carbon emissions would provide signals to users, from energy suppliers to industry to final consumers, of the need to become more efficient in using energy. Decades of cheap energy have produced a system characterized by inefficiencies at every stage of the process from production to final consumption.

Where the scope for efficiency improvement is limited, prices will signal the fact that some kinds of consumption are more costly than others. Consumers will respond, as they always have done, by changing consumption patterns to favor items that are relatively cheaper. Of course, this will entail social change, but relative prices change all the time, in many cases by much more than the likely change in energy prices. The plummeting cost of computers and the rapidly rising cost of healthcare provide two of the most important examples.

Taking account of efficiency improvements and substitution effects, it seems likely that a doubling of energy prices over a long period would reduce average income by no more than 2 to 3 per cent. Optimists like Stern can easily justify a lower number on the basis of plausible estimates of potential efficiency improvements and the like. Pessimists can argue for higher numbers. But even the most pessimistic cost estimates of economists are an order of magnitude away from those offered or implied by the Deep Green and Dark Brown doomsayers.

Would a doubling of energy prices be sufficient to permit a switch to a low-emission or zero-emission technology over several decades? As far as electrical energy is concerned, almost certainly it would be. Some renewable sources of electricity, such as wind, are already competitive in many locations at existing prices or with a modest subsidy. With a substantial further increase in prices, output from these sources would increase. Other energy sources including geothermal energy and (assuming safety concerns can be resolved) nuclear energy would become competitive, as would long-distance transmission lines which would permit more effective use of existing sources of renewable energy.

A doubling of prices would also provide incentives for innovation in a range of technologies including solar photovoltaics, solar thermal and carbon capture and sequestration. It’s unlikely that all of these technologies will turn out to be economically feasible, but it’s equally unlikely that none of them will.

As far as transport is concerned, the rise in oil prices over the past five years has already converted the purchase of fuel-efficient hybrid cars from a piece of conspicuous environmentalism to an economically sensible choice. It will take a long time for carmakers to retool their systems, and some laggards will surely fail along the way, but a shift towards hybrids is inevitable in the long run. With a further substantial increase in the cost of carbon emissions will come a move towards plug-in hybrids and then to electric or fuel-cell vehicles powered by renewable sources.

Of course, it would be mistake to leave prices to do all the work. The case of lighting provides an obvious example. Lighting accounts for around 17.5 per cent of global electricity use. According to the International Energy Agency, using compact-fluorescent in place of incandescent lamps, deploying high- in place of low-efficiency ballasts and phasing-out mercury vapour HID lamps would reduce global lighting demand by up to 40%. More gains could be made by improving installations and using automatic controls.

All these steps make economic sense even at current prices, but for a variety of reasons the switch has been slow to take place. In these circumstances, it makes sense for governments to give the market a push, by developing standards and, if necessary, announcing a phase-out date for incandescents, as has been done in Australia. What is needed is a clear commitment reflected both in the price we pay for energy and in a broad range of public policy settings.

But only an international agreement embracing all major countries will suffice, and the search for such an agreement is stalled until next January, when George W. Bush finally leaves office. His successor will face the task of turning around US policy and then achieving an international agreement that includes developing countries like China and India.

Despite the claims of Dark Browns and Deep Greens, we can, if we choose, have both a stable climate and steadily improving standards of living throughout the world. But the fact that we can achieve these things does not mean we will. At this stage, failure seems all too possible, as does a half-hearted response that will imply the need for much more costly action in the future.

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  1. jquiggin
    April 15th, 2008 at 06:56 | #1

    Joe, I know there were qualifications, but the fact is that the general discussion around the CoR report(from both sides) didn’t stress them.

    And I noted many years ago that the decline in production of lead and mercury was due to the fact that most of the uses of these heavy metals had been prohibited. I’ll see if I can dig it up.

  2. April 15th, 2008 at 08:07 | #2

    My next question then, is why, for the new car market, aren’t you spruiking LPG models? Why is diesel better than LPG?

    Well you tell me.

    Why are Europeans flocking to diesels, while Australians show little interest in LPG, despite numerous government incentives and a huge price advantage?

    The main point I was trying to make is that the only place where there has been significant progress in reducing CO2 emissions from personal vehicles is Europe (the world’s 1st or 2nd largest car market? not sure) and that has been almost entirely due to the switch to diesels. LPG vehicles, like hybrids, have made very little difference in Australia. I’m not saying LPG is a bad option, but clearly the market isn’t warming to LPG.

    If I were to guess why I’d say:
    - The big tank in the boot
    - People are uncomfortable handling what is perceived as a dangerous good
    - Lack of availability of LPG outside cities
    - Less power and torque
    - Inferior fuel economy compared with petrol and diesel
    - Shorter range

    But hey, they’re just my guesses. If LPG was so great why isn’t everyone buying LPG? I reckon diesels are growing faster in Australia despite diesel selling at >$1.60/L atm.

  3. Peter Wood
    April 15th, 2008 at 08:38 | #3

    I suspect that a factor that decreases the purchases of small diesels, hybrids and LPG conversions is that high petrol prices are driving decreased car use. It doesn’t make much economic sense to pay the increased capital cost of a hybrid if you don’t drive it around very much. More environmentally minded people are the ones most likely to decrease their car use, but would also be the ones most likely to be interested in switching to less polluting cars.

  4. wizofaus
    April 15th, 2008 at 09:34 | #4

    Is there any evidence that higher petrol prices are actually causing people to use much less of it? Does someone have a plot of petrol usage, with some indication of a plateauing in recent years?

  5. Peter Pan
    April 15th, 2008 at 10:15 | #5

    The interesting thing about LPG, as I understand the situation, is that it can be used with a much higher compression ratio than gasoline. Almost the same compression ration used in diesel engines. The old 1980′s style conversions that were running around were just a crude fix.

    To “unleash” LPG’s full potential you would need to run it in a engine with essentially the same strength as for diesel to handle the high compression ratios. That is to say, it would be an expensive motor. Then you need to add the cost of all the gas tanks etc. So diesel would need to get much more expensive than LPG to justify the change over.

    I believe Ford Australia had project running at one stage to produce such a motor, but it went nowhere. I suspect that if LPG becomes economically viable we will first see it being used in trucks and commercial vehicles. (The same was diesel entered the market). There is a project in Brisbane to convert Brisbane City Council bus diesel engines to LPG which makes sense to me than the 1980′s gas engine conversions. I don’t know if the conversions can be justified on economics but it only rate payers money down the drain anyway if the numbers don’t stackup.

  6. wbb
    April 15th, 2008 at 11:05 | #6

    I suspect that if LPG becomes economically viable we will first see it being used in trucks and commercial vehicles.

    All taxis (well, in Melbourne anyway) have been running exclusively off LGP for as long as I can remember (which is 30 years).

    Taxi owners would know what’s economical, I’d have thunk.

  7. frankis
    April 15th, 2008 at 11:22 | #7

    Sydney taxis as well wbb and people’s favourite buses here are the quiet, clean gas burners not the dirty noisy diesels. Who’d have thought it?

  8. April 15th, 2008 at 13:10 | #8


    the piece is already a long one, but one point that could be be addressed is the rate at which we need to reduce our emissions.

    I accept that big cuts to emissions can be made cheaply, given time. But the need to do so in a hurry will impose substantial additional costs.

  9. John Mashey
    April 15th, 2008 at 14:35 | #9

    Robert: for the US, there’s a useful McKinsey report:

    If you look at page 5 of the executive summary, there’s a good chart that shows how much CO2 for how much cost, i.e., putting the low-hanging fruit at the left. Maybe there’s a similar analysis for oz somewhere?

    Also, there seems to be a high economic cost (ignoring climate issues entirely) for *not* getting off oil&gas as fast as we can, since it will take a while. See the 2005 Hirsch Report for US DoE, but I think much of it applies to Oz as well:


    See “Three Scenarios” starting at page 51, which show effects of starting serious efforts:
    - when you notice the Peak is here [ugly]
    - 10 years before Peak [bad, but not awful]
    - 20 years before Peak [OK, but we missed it]

  10. April 15th, 2008 at 15:42 | #10

    Sydney taxis as well wbb and people’s favourite buses here are the quiet, clean gas burners not the dirty noisy diesels. Who’d have thought it?

    The taxis use LPG, the buses use CNG, and there’s like five out of a fleet of hundreds.

    CNG is great but it has all the storage problems that LPG has and isn’t available anywhere.

    The taxis use LPG because they don’t travel out of the city, and tax system treats LPG very favourably.

  11. April 15th, 2008 at 15:46 | #11

    Yeah, I think McKinsey’s done a similar study for Australia.

    One issue with this type of study is the question – if these low-hanging fruit make financial sense even at today’s energy costs, why haven’t they already been done?

    One of the discussion papers of the Garnaut emissions trading review asks this very question, and posits that these studies may be ignoring some hidden costs. For instance, the costs of having your home disrupted for several days while builders install insulation, not to mention the costs associated with organizing quotes to install it.

  12. frankis
    April 15th, 2008 at 16:22 | #12

    All of your comment #60 was well-informed and on the money Carbonsink. With that in mind do you promise to now forswear the making of faux-comparisons between oh i don’t know things like base model small-car diesels and optioned up medium car hybrids? The point of hybrids is (as i believe you yourself have observed somewhere above) not the liquid fuel they currently burn. The diesel hybrid is an ab-fab idea for instance. No, the reasons we applaud the engineers at Toyota and Honda for their hybrids include that their creations don’t waste fuel while idling in traffic jams, reclaim energy from braking, and are an interim step on the path to full electric drive fuelled either by fuel cells or by rechargeable battery+capacitor systems.
    Thank you :)

  13. Ian Gould
    April 15th, 2008 at 17:03 | #13

    Wizofaus, US carbon dioxide emissions fell around 1.3% in 2006.

    I can’t find a reference but I believe transport-related emissions fell roughly in lien with total emissions.

    Of course, that doesn’t tell us whether the reductions came about because of fewer miles travelled or more fuel efficient vehicles.

  14. wilful
    April 15th, 2008 at 17:31 | #14

    Wizofaus, another point of evidence is that the public transport system (where available) in Melbourne has had phenomenal growth in patronage the last few years. These have to be from car drivers since they are well above population increases.

  15. John Mashey
    April 15th, 2008 at 17:40 | #15

    re: #61 Robert

    Why don’t people do things that save money?

    Well, I conjecture several answers:

    1) As you say, retrofitting may be a hassle. Our house is 50 years old, done by a Frank LLoyd Wright student with some lovely, big floor-to-ceiling windows with old glass. We really ought to replace them with modern windows, but we can’t face the ripping-out of wood and cost of getting custom-sized everything. We did put in insulating blinds everywhere that matters, and that gets most of the benefit.

    Some simple efficiency measures, like putting a bunch of gear on a single switched power strip, to avoid vampire lights, is really easy.

    2) Some things do take outlay of capital and/or effort at the beginning, and many people either don’t have it handy, or just don’t think that way.

    3) On the other hand, a lot of businesses around here are going all-out on efficiency, putting solar on the rooftops, working with utilities on dynamic load-shedding, etc, etc.

    4) As usual, it’s a lot easier to do things well early, than to retrofit. Hence, it becomes important for government and utility polices to be set to encourage people to do “the right thing” in as minimally-intrusive level as possible, with timing of their choice.

    5) For instance, here’s the California per capita use of electricity compared to US as a whole:, which shows CA flat over last 30 years while US as a whole went up 50%:

    Note that some Northern states do OK, it’s not just CA’s mild climate.

    Basically, a lot of this is government policy, rules on buildings, letting electricity get expensive, and especially, rules that incent utilities for *efficiency*, not for generating more MWatts. They *give away* CFLs, for example.
    Here’s the local utility, PG&E: http://www.pge.com/myhome/

    I get something from them several times a month about energy-saving tips, and there are all sorts of rebates in CA for such [to overcome the upfront-capital effect above.]

    I’ve talked to their CEO, Peter Darbee, a very sharp guy. He says, don’t expect other utilities to get more efficient unless the rules change [in our case, there are 50 sets of rules, sigh.]

    6) This is the Land of the Car, of course, but we do OK on gasoline, if not as good as on electricity.

    We of course would like higher gas mileage requirements [for climate issues], and you may have heard that we’re having to sue the Environmental Protection Agency, who is using every delaying tactic possible not to let us do it. California has a peculiar, unique legal status regarding emissions control in the US, so we get to fight the Federal Government a lot.

    Anyway, I think the message is that it *is* possible to make noticeable differences without getting poor … but it takes decades.

  16. Peter Wood
    April 15th, 2008 at 18:14 | #16

    Robert, as well as the possibility of hidden costs, there are some important market failures that provide barriers to the low-hanging-fruit, especially energy efficiency. Some of these failures involve lack of information about energy usage; there are also ‘split incentives’ where a landlord or builder may not invest in low emission technology because the tenant is the one paying the bill, and the tenant does not invest because they won’t live there for long enough etc.

    Some of these market failures are discussed in Stern, p378. Some of the work in this area by the Rocky Mountain Institute (Lovins et al.) is also good.

    On a related note, when a supermarket uses open-air refrigerators and open-air freezers because a customer is more likely to buy something from an open air refrigerator, does this represent a hidden cost or a market failure?

  17. April 15th, 2008 at 18:23 | #17

    One clever idea I heard of was a hybrid car with the primary power unit in a small detachable trailer (I’d guess, with one castering wheel and a mount allowing the trailer to pitch but not roll or yaw). For normal use you just use the electric part and recharge it from the mains, only connecting the trailer up for longer journeys.

  18. wizofaus
    April 15th, 2008 at 18:49 | #18

    wilful, yes, there’s all sorts of indirect evidence, but surely there are available figures on exactly how much petrol was sold in Australia over the last few years?

  19. Salient Green
    April 15th, 2008 at 19:08 | #19

    LPG injected diesel system

    Diesel conversion to natural gas

    Both provide substantial benefits over diesel. A PHEV using this type of technology is only a tiny step away, a brave step.

  20. Joe
    April 15th, 2008 at 19:51 | #20

    John, re #51, as I remember, the reaction to the CoR was vicious, the campaign against climate change was Sunday School stuff by comparison.
    The authors of Peak Minerals mention the issue of uses of mercury and lead being prohibited; but selenium and zirconium production has peaked too and AFAIK zirconium compounds are not toxic.

  21. Stephen L
    April 15th, 2008 at 21:40 | #21

    I think this is one of the best blog posts I’ve ever read. I intend to email it to a lot of people who are tempted towards dark green thinking. (There that should avoid me getting banned as a troll for a while :) )

    Seriously, I think its a great summation of some things I knew, with some things I had never understood thrown in.

    Besides Roberts point about the much greater expense of trying to make changes quickly, the one thing I would add would be some acknowledgement that energy isn’t the whole problem. Deforestation and methane emissions from livestock are particularly significant. No doubt the same case could be made (perhaps more easily) but I think its worth mentioning them. I’m amazed how many people refuse to accept that meat consumption could even be part of the global warming issue.

  22. wbb
    April 16th, 2008 at 00:48 | #22

    I’m amazed how many people refuse to accept that meat consumption could even be part of the global warming issue.

    I suppose because we hope that we can cut other stuff to still leave room for meat eating. If we are at the point that humans can’t even eat meat – then it’s really time to have a long hard look at our numbers.

    Two is enough ( as they say in Indonesia.)

  23. John Mashey
    April 16th, 2008 at 01:28 | #23

    re: #61, #65, #66
    Split costs, breakeven times

    The split costs especially affects renters, whether home or business. Those who actually own their buildings think about breakeven periods to recover the investment, and in some places, people move around enough that this makes it harder. Suppose the breakeven for some energy-saving investment is 7 years, and a house changes hands every 5. Nobody ever does it.

    Ideally, when one sells a house, a standard disclosure would be prominent display of the average cost of electricity, gas, and water over the previous 2 years, i.e., akin to the miles-per-gallon stickers on cars.

    SolarCity, a fast-growing local solar installer [our town did a bulk buy for ~80 homes, they gave us a good discount, and the trucks were here every day for a while] just today announced a plan to “lease” solar panels in such a way as to avoid the upfront capital cost. This yields the homeowner a modest positive cashflow from day one. They don’t save as much in long run, but it still works better when people move, and may help the split-costs problem somewhat.

    I’ve talked to their CEO, and as important, talked to their installers often in the local deli. Clever company, innovative, treats employees well.

  24. SimonJM
    April 16th, 2008 at 09:52 | #24

    I admit I’m pretty much clueless on the economics but at least I can see some of the crucial factors economists and policy setters in general will have to deal with. For example:

    The Chinese and the Indians wish to live 1st world living standards and we don’t have a spare 4-6 Earths or an extra atmosphere where they can cheaply dump their C02 like we did. Their demand for meat and vegetables alone would be cause for alarm in a resource finite and globalised world.

    Nor do I imagine we have the capacity, capital or will for all of us to do this sustainably in a time frame that will make a difference esp when some are saying unless we look to stabilize CO2 at 320-350 the game is over.

    Throw in this is in the context of unavoidable climate change, Peak Oil on the horizon and looming food and water shortages that are already starting to bite.

    Which pretty well means arguing over things like hybrids etc is pretty much a waste of time and nothing short of treating this as similar to a mobilizing a countries resources to a war footing will do.

    Having said that there are some that think even if we use up all our oil and coal reserves since the useable reserves are overstated we can still use them and come up under the IPCC targets.

  25. gordon
    April 16th, 2008 at 10:16 | #25

    Prof. Quiggin: “Once we think in terms of information, it is natural to think of economic progress, not as more of everything, but as a set of qualitative improvements”.

    Very reminiscent of Brundtland’s (Our Common Future) discussion of “development” – perhaps the attribution should be explicit.

  26. John Mashey
    April 16th, 2008 at 11:15 | #26

    re: #74 Simon JM

    “Having said that there are some that think even if we use up all our oil and coal reserves since the useable reserves are overstated we can still use them and come up under the IPCC targets.”

    You may want to go back to the Kharecha & Hansen paper is mentioned in #34, as they address this fairly seriously.

  27. SimonJM
    April 16th, 2008 at 14:14 | #27

    Thanks John M have you heard this one?


    David Rutledge: Hubbert’s Peak, the Coal Question, and Climate Change 10/17/2007

    David Rutledge, Caltech’s Tomiyasu Professor of Electrical Engineering, presented a Watson Lecture called “Hubbert’s Peak, the Coal Question, and Climate Change.” Rutledge discussed whether oil, natural gas, and coal resources will be sufficient in the future, and explained efforts to predict the changes in climate that will result from consuming these fossil fuels.

  28. April 16th, 2008 at 16:55 | #28

    frankis #62:

    do you promise to now forswear the making of faux-comparisons between oh i don’t know things like base model small-car diesels and optioned up medium car hybrids?

    My point is, you can’t make a base model hybrid because the technology is so expensive. Hybrids don’t make economic sense for most people, and therefore hybrids will never make a real contribution to reducing CO2 emissions until oil prices rise to astronomic levels and/or we put a price on carbon.

    the reasons we applaud the engineers at Toyota and Honda for their hybrids include that their creations don’t waste fuel while idling in traffic jams, reclaim energy from braking, and are an interim step on the path to full electric drive fuelled either by fuel cells or by rechargeable battery+capacitor systems.

    Already made that point at #7.

  29. John Mashey
    April 16th, 2008 at 17:23 | #29

    re #77 Simon JM

    Thanks, I need some more on that. I’ll catch up after tomorrow, which is dedicated to “preparing for sea level rise in the Bay Area” for local governments. If you haven’t seen the very nice interactive map athttp://flood.firetree.net/?ll=37.6425,-122.2202&z=6&m=1 , I recommend it. Pick your area, then plug in +1meter, +2, etc; gray = below sea level. This one shows the SF Bay Area, but you can pick your favored places.

  30. wizofaus
    April 16th, 2008 at 17:50 | #30

    Melbourne looks relatively safe from even a 2m rise, surprisingly:

    Add in a 2m storm surge, and you’re looking at some serious damage of course, but surprisingly few residential areas affected.

  31. kerneels
    April 16th, 2008 at 18:18 | #31

    There are other ways to reduce fuel consumption than merely changing the types of fuel available. In Nottingham, England, vast savings have been made by building large car parks on the edge of town right around the city. For a relatively small sum you can park your car and hop on a small and frequent bus to take you into town. To further persuade you to this most sensible solution, car parking (other than at the railway station) is very expensive. Each train station is also supported by an excellent and frequent bus service.

  32. frankis
    April 16th, 2008 at 19:38 | #32


    hybrids will never make a real contribution to reducing CO2 emissions until oil prices rise to astronomic levels and/or we put a price on carbon.

    But there’s no need to single out hybrids for attention here – many things won’t happen until the price of carbon rises – and you still need to compare like to like for a comparison to make sense. I bet a no-frills small diesel hybrid could be built and sold by Toyota, now, for less than a $5k premium on the base model price. For that premium suppose a punter might want to save $1k pa on his distillate cost, about 600litres worth. He’d probably need to be using currently about 1500lpa which would drop by say 40% to 900lpa (a $1000 pa saving). Hybrids are only an economic proposition for city driving so his current 1500l of distillate would be taking him less than 25000 km pa, representing a horrible 100km per day of city traffic commuting. Sadly quite a number of people do in fact do something like this (and of course there is also the commercial vehicle market) so, yes, I think a small diesel hybrid could be offered and selling well at this very moment. That is I’m confident it could be built and sold as a commercial proposition by a company such as Toyota, and could be dropping emissions and fuel costs by something like that 40% for its buyers.

    On the Prius example that you addressed, though, what I am suggesting is that the base on-road price of a Prius is about $35,000 (not the $50k for the high-spec model that you cited) and that at that price it should be compared with something like a Camry selling for around $30,000 (say, with similarly high spec as the base model Prius). Must that be already an economic proposition for many potential buyers of a well-appointed medium sized car from a quality manufacturer? Surely “Yes!”.

  33. April 16th, 2008 at 20:32 | #33

    I bet a no-frills small diesel hybrid could be built and sold by Toyota, now, for less than a $5k premium on the base model price.

    You’d lose that bet. Cost is the reason why PSA is introducing diesel-hybrids at the high end first, and later than anticipated (see #13 above)

    You can compare the Prius with high-spec vehicles all you like (and yes the base Prius is well-appointed) but I’m still waiting for you to show me a hybrid that competes in the sub-$25K market and/or comes at premium of less than 15% over the petrol model. That’s when you’ll get the average punter interested.

  34. frankis
    April 16th, 2008 at 22:17 | #34

    No I’d win that bet Carbonsink. We possibly won’t find out soon but we may. What PSA is hoping to do – bring a hybrid to the mass market – is how many years behind what Toyota and Honda have already done? That would account for many of their problems. Even so:

    “Robert Peugeot, vice president for innovation and quality at PSA/Peugeot-Citroën admitted to Automotive News in January 2007 that the company’s “challenge is to move from prototypes to an affordable car.” He said the current estimate of a marketable diesel hybrid for $5,000 extra is “clearly too much.”

    He seems to agree with my cost estimate, doubt that his customers would pay that much for it. I didn’t say that Toyota should want to do it but that they could, and I think it’s clear that Mr Peugeot would agree.

    You also called the suggestion that the Prius was already an economic proposition “nonsense” and I think it’s clear you’re wrong. Whether your “average punter” in the market for an optioned up Camry-sized vehicle would agree I’ll leave to you to discuss. On the matter of your small diesel hybrid’s prospects it would be a mistake to assume that the marketing of automobiles depends upon appeal to the rational economic faculties of average punters.

  35. SJ
    April 16th, 2008 at 22:49 | #35

    frankis, it’s obvious from previous experience that carbonsink doesn’t really understand any of this.

    It’s pointless to try to engage carbonsink in any kind of real discussion.

  36. April 17th, 2008 at 10:23 | #36

    frankis, it’s obvious from previous experience that carbonsink doesn’t really understand any of this.

    It’s pointless to try to engage carbonsink in any kind of real discussion.

    I don’t think there’s any need for that is there?

    I’m playing devil’s advocate here. In another forum I’d argue passionately for hybrids, but in the green-left blogosphere hybrids are sacrosanct and beyond criticism. I’m here to challenge that view.

    I maintain that from a rational economic perspective a Prius makes no sense. The base model is $37,500. For that money you could buy a Commodore with stability control, side and curtain airbags, which you don’t get with the base Prius. (BTW, I believe that the vast majority of Priuses sold are the $47K i-Tech models)

    it would be a mistake to assume that the marketing of automobiles depends upon appeal to the rational economic faculties of average punters.

    Clearly it doesn’t, otherwise no-one would buy a Prius, but hybrids aren’t going to break out of the 2-3% niche market (smaller in Australia) unless they make economic sense.

    Looking around the world the only place where I can see a big move from an existing technology to a new technology in response to high fuel prices and concerns about carbon emissions, is the move from petrol to diesel in Europe. Its not happening with hybrids in the U.S. and its not happening with LPG in Australia — both are stuck in the sub 3% range.

    If these things really made economic sense, why aren’t we seeing them make significant inroads? No-one has answered that question.

  37. wizofaus
    April 17th, 2008 at 10:43 | #37

    carbonsink, that’s a bit silly – that’s a bit like asking why doesn’t everyone own the most fuel-efficient vehicle they possibly can? Indeed, if economic sense was the main driver behind owning cars, a lot of people wouldn’t own cars at all (I’m still struggling over whether to renew the rego on our 2nd car. It makes no economic sense to keep it, but it *is* a pain when the main car needs servicing or repairing to have to arrange car hire etc.)
    I’d certainly agree that presently there isn’t a lot of economic sense in choosing the Prius over a number of other fuel-efficient vehicles.
    But FWIW, personally I wouldn’t buy a Prius because it looks ugly.

  38. FDB
    April 17th, 2008 at 11:04 | #38

    “But FWIW, personally I wouldn’t buy a Prius because it looks ugly.”

    Awful rear-vision too.

  39. frankis
    April 17th, 2008 at 12:16 | #39

    Here grab yourself a bargain Prius and lose the bicycle, Carbonsink:

    New base model Camry $28999
    New Prius $33900

    Then, can you explain to me why the bargain priced Lexus GS450H – a snip at only $121,964 – not only outperforms the GS430 but costs $15,460 less (hey knock yourself out and get the hybrid Lexus plus the beaut small diesel of your dreams, two cars for the price of a GS430!) but of course also boasts far better fuel economy. None of this seems rational at first glance!

    Once you’ve warmed yourself up on that Carbonsink you might like to explain the market for Ferraris and Rolls Royces to me as well, because those I find endlessly confusing.

  40. John Mashey
    April 18th, 2008 at 06:08 | #40

    I don’t have a Prius, am waiting until PHEVs come out to switch cars. However, there are sometimes-economic reasons to have a Prius, especially when one considers externalities and pricing thereof by governments.

    1) People may know that California has fought a long battle to encourage more-electric cars in any way possible. The movie “Who killed the electric car?” is interesting, for example. CA would *like* to make as many cars as possible BEV or at least PHEV, not just for climate reasons, but especially for air-pollution reasons. The California Air Resources Board and its various branches are actually powerful entities around here. In order to build volume and lower costs, they sometimes give references to products at least heading in the right direction.

    2) In order:
    Southern California
    Central Valley
    and sometimes San Francisco Bay Area

    have difficulties meeting air quality regulations, given the particular climate and geography here.

    It is good to see that diesels are getting getting better. Ethanol/biodiesel, unfortunately are little or no better than gas/diesel from a pollution viewpoint.

    Air quality is one of those externalities, and governments at all levels here are tasked with improving it.

    3) The SF Bay Area has “carpool lanes”. Although not necessarily managed in the best way, hybrids were able to get stickers allowing them to drive in carpool lanes even with just one person. Many bought Priuses for that reason alone.

    4) In the long term, since petroleum production will be shrinking, any private autos will increasingly have to be BEV or PHEV, because fuel is going to get very expensive.

    5) Note: the peculiarity of CA: alone amongst US states, it is legally empowered to set more stringent emissions rules than the Federal ones, but if it does, other states may then copy the CA rules.

  41. April 18th, 2008 at 12:43 | #41

    wizofaus and frankis:

    People buy cars for lots of reasons; performance, looks, resale value, prestige, carrying capacity etc etc. AFAIK the only reason for buying a Prius (or any other low emissions, ultra-efficient vehicle) is to use less fuel and emit less CO2. Given that there’s currently no price on carbon, the latter is only relevant to green-left do-gooders (like myself) which is a pretty small market AFAICT.

    Nobody is going to buy a Prius because it goes faster (it doesn’t), it carries more people (it doesn’t), or it looks better (most people don’t think so judging by above). People are only going to buy a Prius for prestige (i.e. green-left smugness value), because it (possibly) holds its value better, and because it might pay for itself in fuel savings, especially if crude continues its current trajectory.

    Besides, we can bang on all day about the pros and cons of hybrids, the fact is they’ve made bugger all impact on the new car marketplace, a fact that you all conveniently ignore.

    All of this gets back to my fundamental point: Reducing CO2 emissions is going to cost a lot more than the “one percenters” say it will. Hybrids are an example of a great technology that could make a difference but its just too expensive at the moment to make significant inroads into the marketplace. We need a high price on carbon now to make hybrids viable, not populist nonsense like Rudd’s “Fuel Watch” scheme.

  42. James Haughton
    April 18th, 2008 at 13:57 | #42

    Hi Prof Q.
    Might I suggest something about the economics of information control would add to your article – specifically, about the costs & benefits of the current world IP system. You treat information as a public good, but increasingly aggressive enforcement of IP in the most relevant areas to your argument (i.e. genetics (food), information technology, pharmaceuticals (health)) is transforming it into a private good. Is there a risk of slowing growth as a result? Or does the patent monopoly and fee-for access journal system promote innovation faster than it obstructs it? Hope this isn’t too off-topic.

  43. wizofaus
    April 18th, 2008 at 14:09 | #43

    carbonsink, I actually have a theory about FuelWatch – the government knows percectly well it won’t reduce prices, and may even slightly increase them, but a) the voters that worry about high petrol prices will at least think “well I guess they’re trying to do something”, and not be tempted to vote for an alternative party that promises to do something genuinely dangerous like reducing petrol taxes, and b) it should at least have the effect of reducing the volatility in prices, which better exposes their gradual upward trend, and hence hopefully better encouraging people to reduce their dependence on high levels of petrol consumption.

    As for the impact of hybrids on the new car market – I believe they’re getting close to 10% of all new car sales in the U.S. already. Australia’s obviously lagging behind for various reasons.

  44. April 18th, 2008 at 14:19 | #44

    I believe they’re getting close to 10% of all new car sales in the U.S. already.

    No, it stuck at less than 3%, and diesels are >50% of new car sales in Europe and growing. See #8.

  45. wizofaus
    April 18th, 2008 at 14:46 | #45

    Fair enough CS – I did find some websites claiming that they’re up to 15% of all new vehicle sales in some areas (e.g. the Upper Midwest), but your article is presumably giving correct information for the whole of the U.S.

  46. April 25th, 2008 at 13:17 | #46

    An update what’s happening with so-called ‘clean diesels’ and diesel hybrids:

    VW Introduces Production Version of BlueTDI Engine at the Vienna Motor Symposium

    This engine already satisfies the Euro-5 standard that comes into effect in autumn 2009. In order to meet the Bin 5/LEV2 requirements in the US, VW redeveloped the four-cylinder engine. The BlueTDI engine will debut in the US Jetta this summer.

    VW Diesel Hybrid Kaput

    According to the in-depth preview of the Golf VI in the March 27 issue of Auto, Motor und Sport (print edition only), the “forward-looking diesel-hybrid is already a thing of the past.” The culprit (once again): it’s too expensive.

  47. April 26th, 2008 at 21:22 | #47


    It’s not enough to suggest that it is theoretically possible that future economic growth might hinge on non-material consumption (with minimal energy consumption growth).

    It is very difficult to imagine such an “information” or “services” society that it is not supported underwritten by growth in material consumption (either domestic or provided by other countries as is presently the case with China making most of our “stuff”). No country has raised its GDP without increasing the use of resources (and Kuznet’s has been debunked even by the likes of the World Bank). But I will take your word for it that it is possible for economic growth to continue ad infinitum whilst reducing use of natural capital.

    Economists who are serious about a future for humanity must be advocating for limits on the growth of material consumption and working out practical models for a quick transition to the qualitative growth societies that you have recommended. The present economic mantra tends to be “buy more” and does not differentiate between goods and services. We need not weep at the thought of a Christmas that doesn’t involve buying 5% more than last year.

    Until an information society as you describe it is modelled and advocated for by the economics profession, and clear distinctions are made between “better recipes” and “more ingredients” I will be pushing for limits to consumptive growth. Sincerely deep green until that time.

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