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Economists agree!

February 19th, 2009

Tim Lambert links to this article by Eric Pooley in Slate’s The Big Moneye which points out that, for all the disagreement among economists regarding the details of climate change policy, there is substantial consensus on the following main points
(i) the cost of action to stabilise atmospheric concentrations of CO2 and other greenhouse gases will be of the order of 1 per cent of GDP
(ii) a strong mitigation policy is preferable to business as usual

There is also widespread, though not universal, support for the view that it is best to act early and strongly rather than waiting for more information.

The article makes the point that the quarrelsome nature of economists obscures the level of consensus and that has certainly been my experience.

Also from experience, I know that quite a few readers of this blog are unwilling to believe that (i) can be right. But the argument from personal incredulity is not a sound basis for reasoning. It’s easy to check that the cost can’t be much more than 10 per cent of GDP (about five years worth of economic growth), which contradicts the common intuition that cheap energy is economically vital. Once you accept that upper bound it seems silly to disagree with the experts on the best estimate in the range 0-10.

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  1. AdamC
    February 19th, 2009 at 22:05 | #1

    Surely prefacing the word “only” in front of 10% of GDP is pretty ridiculous?

    In a broader sense, there is also the problem that an ETS (or equivalent), given the reductions in economic growth/increase in economic contraction it would create, will reduce Australia’s ability to adapt to climate change.

    Whatever one thinks about climate change and climate change policy, one has to acknowledge that global emissions reduction programmes are extremely unlikely to result in a suspension or prevention of climate change.

    Australia should devote its resources to adaptation and mitigation rather than a (symbolic) contribution to emissions reduction.

  2. jquiggin
    February 19th, 2009 at 22:44 | #2

    10 per cent is a big number in terms of day-to-day political choices, but small in relation to the belief that cheap energy is essential. And, as the post spells out, it’s an upper bound – the true cost is closer to 1 per cent.

    The rest of your comments are unsupported assertions, filled with question-begging phrases like “one has to acknowledge”.

  3. Alanna
    February 19th, 2009 at 23:03 | #3

    Adam says

    “Whatever one thinks about climate change and climate change policy, one has to acknowledge that global emissions reduction programmes are extremely unlikely to result in a suspension or prevention of climate change…..”
    Australia should devote its resources to adaptation and mitigation rather than a (symbolic) contribution to emissions reduction.”

    Adam – adaptation and mitigation is vague.

    Do you have any practical examples of devoting resources to adaptation or mitigation against climate change caused by global emissions?

    It would seem very practical to me to reduce global emissions and to set targets. We have been globally irresponsible but that is a poor excuse to do nothing at all. Some firms are not going to like it but if they have to be dragged kicking and screaming etc (in particular in Australia, the entire fossil fuel industry – you dont work for them do you?).

    Many firms have the resources to innovate to reduce emissions now, they simply wont unless they are given disincentives to continue as free emitters. That is the nature of the beast.

  4. February 19th, 2009 at 23:05 | #4

    In truth, economists don’t agree on any policy issue except free trade, as academic surveys have repeatedly confirmed. It’s true that most agree on the misleading methodological assumptions that guide mainstream economics. Most economists are Keynesians. However, a common false understanding of how the economy works can still lead to different policy conclusions on climate change, given that the totalitarian central-planning impulse strikes everyone in a different way. Thus, economists will plug in a range of different misleading assumptions into their “scientific” models. By the time we figure out that their projections are bogus, of course, the costs will have eventuated.

    The record of the dismal science is so pathetic, I’m surprised anyone takes what economists have to say seriously. It would be much more appropriate to laugh in their face. In terms of the crises that the average Joe has endured – the great inflations and other economic turmoil – much of it has been brought about in line with the advice of mainstream economists (This is a truism. Politicians don’t follow the minority, they move in line with what the majority of their advisors tell them).

  5. Ikonoclast
    February 20th, 2009 at 06:06 | #5

    JQ argues that cheap energy is not economically vital. I agree with one caveat. Energy as such IS economically vital and needs to be available in sufficient quantity to run all vital functions for modern urbanised civilization. It’s just not vital that it be as cheap as it is currently.

    It seems clear now that greenhouse emissions are unlikely to be reduced by preemptive political or policy action. Global civilization has thus far proven itself incapable of acting on the scientific warnings.

    Perhaps the best we can hope for now is that natural limiting mechanisms will kick in so that aviod runaway global warming. As oil, natural gas and then coal run out we will be forced to find other energy sources. As sea levels rise and coastal cities are inundated, CO2 pollution will drop (eventually) as economic activity collapses.

    We should still attempt to preempt this gloomy scenario but I am not sanguine about our system’s ability to adapt with logical aforethought. It seems the best we can hope for now is adaptation through and after the event.

  6. John Mashey
    February 20th, 2009 at 08:57 | #6

    But note guest post here, in which I raised concerns about economic growth rates in the face of Peak Oil and (later) Peak Gas over the coming century.

    I’ve asked this in various ways in various places, and have yet to get a satisfying answer, although maybe I just can’t ask it the right way.

    To be really clear, if the ideas of people like Bob Ayres have merit [that energy*efficiency is a big component of economic growth, i.e., much of "Total Factor Productivity"], it is *even* more important to move faster and harder on efficiency and sustainable-energy replacements, and to stretch oil&gas supplies as long as possible.

    It’s not that people in 2100 can’t have a reasonable economy without oil, but that if fossil fuels aren’t treated as a one-time inheritance of energy capital, and carefully *invested* in efficiency & sustainable energy supplies, people can run off an “energy cliff” where they lack the capital to make the transition.

    This is akin to microeconomics of corporations, particularly high-tech ones with fast product cycles. Suppose you have a profitable product shipping, and some cash in the bank. That product may become obsolete, in which case its revenue will drop quickly. Before that happens, you’d better spend money on R&D to develop the next product, because if you wait, you may no longer have the capital to do it … especially if you spent it all on fancy corporate headquarters and nice parties.

    This exact failure occurs all the time, where people intellectually *know* that some revenue stream is finite, but still *act* like it continues indefinitely.

    Smaller technology companies are especially clobbered by technology transitions they don’t see (or don’t want to see) coming. For example, there were once dozens of substantial proprietary *minicomputer* companies, most of which did their best to ignore microprocessors. With the exception of HP (and IBM, which always had a big range), those companies are gone. I used to spend hours with engineers from such companies, telling them micros were coming, and most them kept telling me why they could keep business-as-usual. Sigh.

    See also: current events in Detroit.

    Of course, world energy supply is rather more important than the fate of minicomputer companies.

  7. Tony G
    February 20th, 2009 at 09:01 | #7

    Economist Agree ? That is definitely funny.

    “Why do People Make Fun of Economists?”

    How many economists does it take to change a lightbulb? The answer is none. They just sit around in the dark waiting for the invisible hand to do it.

  8. Alanna
    February 20th, 2009 at 09:13 | #8

    Tony G # 7

    Tony I thought you preferred the invisible hands!

  9. Tony G
    February 20th, 2009 at 09:23 | #9

    Only economists do

  10. AdamC
    February 20th, 2009 at 11:41 | #10

    JQ, I was asserting that it is unlikely that the nations of the world will be able to agree to cut emissions sufficiently to arrest climate change. While I do not claim to be able to predict the future, there are several reasons to be very sceptical about the likely success of emissions reduction programmes. One could consider the history of cartels and commons as a start. (Indeed, even getting schemes to work within countries seems to be rather difficult!)

    Alannah, the words adaptation and mitigation are broad (rather than vague) and would clearly encompass many different projects and activities. While we don’t yet know how climate change may affect, say, different parts of Australia, an example of an adaptation would be moving water from places which are getting wetter (e.g, coastal Queensland) to places that are getting drier (e.g, south and south-western Vicrtoria).

    No, I don’t know of any states which have begun to pro-actively set aside resources for adaptation and mitigation purposes. That does not mean it isn’t a good idea.

    Lastly, no, I don’t work in the fossil fuels industry but, yes, I am sophisticated enough to understand that different parts of the economy are inter-linked and none of us will be immune from the costs of emissions reduction schemes (which may or may not accomplish anything).

  11. Alanna
    February 20th, 2009 at 11:53 | #11

    Adam#10
    No none of us will be immune. It will come through price effects, but the whole point is that the costs of continuing down our current pathway in terms of just letting people emit or use dirty technology is to eat ingto future resources. Some are already bearing this cost disproportionately. It needs to be tackled at the source. Im agree some mitigation is needed as well but the example they are now discussing eg of correcting the SA end of the Murray by flushing it with seawater does nothing to address the overallocation of water rights (and excessive extraction of water at the upper end). Mitigation and adaptation costs will continue to grow beyond our capabilities if we do not reduce the amount of emissions being pumped into the atmosphere, that is the best resources should be thrown at the reducing the source of a problem not its consequences.

  12. Jim Birch
    February 20th, 2009 at 11:59 | #12

    “the argument from personal incredulity”?

    I read it as the “argument from libertarian psychological causality”. Something like:

    I am religiously committed to libertarianism;

    Therefore: externalities can’t exist;

    Therefore: any attempt to deal with externalities rationally is irrational (and: irrational arguments are best countered with other irrational arguments)

    Corollary: Whatever.

  13. February 20th, 2009 at 13:35 | #13

    James Hansen, in his recent paper, has suggested that any CO2 stabilisation target that is greater 350 ppm is likely to be quite dangerous, mainly because of ice/albedo related feedbacks. Meinshausen et al. Multi-gas Emissions Pathways to Meet Climate Targets, Climatic Change 75(1): 151-194, estimates that this would require global emission reductions of over 5% per year, unless more CO2 was removed from the atmosphere later.

    This raises the question: how much will it cost to reduce global greenhouse gas emissions by 5% per year?

  14. mitchell porter
    February 20th, 2009 at 16:21 | #14

    Peter Wood asks the important question. John wrote

    “the cost of action to stabilise atmospheric concentrations of CO2 and other greenhouse gases will be of the order of 1 per cent of GDP”

    but stabilize at what levels – 450ppm? 550 ppm? I am aware of no economic analyses at all for targets which require an actual *drawdown* of CO2. I could believe that 10% of GDP is an upper bound even in this case, because achieving carbon neutrality basically requires a big change to infrastructure but one that only has to be performed once (though it may take years to complete). And there may be ways to make it much less expensive, perhaps even a paying proposition. For example, if an actual use could be found for trillions of tons of purified CO2 (maybe as an ingredient in construction materials, like these proposed carbon-negative concretes??), the effort involved in carbon capture might pay for itself, rather than just being a prelude to the further expenses entailed in piping the CO2 hundreds of kilometers to the site of sequestration.

    It would be a good thing if we could get a list of some of these studies which have demonstrated the low cost of mitigation; even just a few key papers. (I’ve asked before, and I’m sure they exist.) I would also very much like to see some costings of the emissions pathway being championed by the Worldwatch Institute – costings both of the climate change impacts which would still occur, and of the efforts required to reduce emissions to the proposed degree – because I think this particular mitigation scenario can be as valuable in getting us on track as has been James Hansen’s promotion of 350ppm as a target.

    I would like to think that the time is coming when we can say with confidence that the true disaster scenarios are off the table and it’s now all about finetuning our actions – choosing between a range of low-target, strong-mitigation futures in which we never go anywhere near catastrophe. The main problem for that outlook is the melting Arctic, which is a threat of unknown magnitude and hence adds an unknown increment of urgency to the situation. Readers may be interested in the discussion (in comments) at New Matilda on this and many other issues.

  15. christine
    February 21st, 2009 at 04:53 | #15

    I tend to think there’s more consensus than gets played in the media (and if you scratch a lot of the economists who argue against policy actions, they are doing so because they disbelieve the science, not because given a particular scientific result they’d disagree wildly on policy solutions, from my experience). But there are a quite a few economists who seem to want to argue against. For instance, these guys, though I haven’t checked to see whether they disagree with point (1) or point (2):

    “Given this uncertainty [over the environmental and economic effects of CO2 emissions], and the historic failure of central planning to do anything other than undermine economic welfare, the editor, Colin Robinson, one of the country’s leading energy economists, argues that it is prudent to proceed with caution. The flexibility of the market economy will deal better than central planning with any problems arising from man-made climate change. The wide ranging array of regulations, taxes, subsidies and artificially created incentives proposed by climate change activists should be rejected.”

    Oh dear. (Also: taxes are a central planning solution? Someone tell Greg Mankiw he’s a communist!)

  16. Hal9000
    February 21st, 2009 at 07:55 | #16

    I rather like John Mashey’s argument @6 on the psychology of complacency. It dovetails nicely with Alanna’s reference @11 to the Murray-Darling’s woes. The point is that it’s easy to act irrationally when presented with artificially cheap resources and encouraged to ignore costs.

    This pattern repeats itself so often it’s a bit extraordinary that people apparently capable of entering comprehesible English sentences on their keyboards can’t see it. I’ve just been on hols in Tassie, where tourists pay substantially to get up close to a colony of Australian fur seals. The guide’s patter was about the history of exploitation of these creatures: in the nineteenth century apparently over half a million were killed for their pelts in a few years. The population collapsed almost to the point of extinction. At this point, of course, the price of seal pelts went up, making the slaughter of the last survivors even more lucrative. Only state action to protect the species saved them. Now, I don’t what the impact of removing this major top-end predator species was on the marine ecology, but I’d be confident it wasn’t good – cf. the removal of wolves from Yellowstone.

    Fisheries around the world have suffered from similar histories of collapse caused by irrational exploitation encouraged by pricing based on greed and thin air.

    The same has been true of water extraction rights, with well-known results.

    The argument being run now by AdamC and his co-religionists is that the sky will collapse if we so much as begin to correct this well-advanced Rake’s progress with regard to fossil fuels. Given that a great deal can be accomplished in the early years simply by improving efficiency, the corollary of this argument is that we should deliberately waste as much fossil fuel energy (or emit as many GHG’s, or raze as many forests etc etc) as possible in order to improve the economic bottom line.

    But then, as we’ve witnessed with the RWDB commentariat and the Victorian bushfires, actual evidence is something to which resort should be had only when it supports faith-based argument.

  17. carbonsink
    February 21st, 2009 at 08:08 | #17

    I am personally incredulous about (i) on the basis that if the cost were truly in the order of 1 per cent, someone, somewhere in the world would have done it successfully by now. Europe, for example, has come nowhere near the emissions reductions required to stabilise CO2, but many would argue it has already cost the EU in the order of 1 per cent of GDP to achieve even modest reductions. This suggests that either; a) the Europeans are using a very poor model (which we seen determined to copy) or b) its inherently more expensive to reduce CO2 emissions than economists believe.

    Of course I support (ii) wholeheartedly.

    It will be fascinating to see how far global emissions fall in 2009, which they undoubtedly will, and how that correlates to the fall in global GDP.

  18. charles
    February 21st, 2009 at 10:28 | #18

    I seems obvious to me that there is a lot of economic activity to be had cleaning up our mess, that we are in a situation where we need economic activity.

    I can’t see why we just don’t get on with it and stop the crap.

  19. February 21st, 2009 at 13:05 | #19

    carbonsink,

    The reasons why no country has done it yet are political — industries that don’t have much future complain that if the government makes deep reductions in emissions, then the sky will fall in, jobs will be lost, the industry will move overseas etc etc. The fact that industries do this is part of the usual rent-seeking that has always gone on. The fact that governments believe them is because they are gullible and stupid.

  20. carbonsink
    February 21st, 2009 at 13:16 | #20

    The reasons why no country has done it yet are political

    That begs the question why all governments of all political persuasions are “gullible and stupid”? Why is it that Big Carbon manages to convince all politicians everywhere that reducing emissions will be outrageously expensive? Why is it their arguments are so much more persuasive than the influential economists above?

    Its been 12 years since Kyoto for chrissakes, just when are we going to see some evidence that CO2 emissions can be significantly reduced at a reasonable cost?

    BTW, its not hard to find plenty of economists who deny the existence of the problem, let alone one that’s relatively cheap to fix.

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