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Uncertainty and climate change

September 25th, 2009

I was at a conference on uncertainty and climate change in Berkeley last week, and gave the wrap-up panel discussion with Geoffrey Heal. We’d discussed a wide range of uncertainties and ambiguities, from future emissions scenarios to model uncertainty to perception and communication issues, and we were asked to comment on how, with so much uncertainty, economists can make useful recommendations.

Before I give the answer I came up with, a few side issues

First, as I mentioned briefly, while everyone at this workshop and many others were working on ways to reduce, manage and understand uncertainty, there is also a large and (at least until recently) very well-funded group working, to create and disseminate uncertainty, ignorance and confusion, with sufficient success that much of the political right in Australia and nearly all in the US have been (with their own complicity) deluded into thinking the problem is illusory.

Second, it’s a straightforward implication of standard economic analysis that the more uncertainty is the rate of climate change the stronger is the optimal policy response. That’s because, in the economic jargon, the damage function is convex. To explain this, think about the central IPCC projection of a 3.5 degrees increase in global mean temperature, which would imply significant but moderate economic damage (maybe a long-run loss of 5-10 per cent of GDP, depending on how you value ecosystem effects). In the most optimistic case, that might be totally wrong – there might be no warming and no damage. But precisely because this is a central projection it implies an equal probability that the warming will be 7 degrees, which would be utterly catastrophic. So, a calculation that takes account of uncertainty implies greater expected losses from inaction and therefore a stronger case for action. This is partly offset by the fact that we will learn more over time, so an optimal plan may involve an initial period where the reduction in emissions is slower, but there is an investment in capacity to reduce emissions quickly if the news is bad. This is why its important to get an emissions trading scheme in place, with details that can be adjusted later, rather than to argue too much about getting the short term parts of the policy exactly right.

A third point, raised by Michael Hanemann is that the global average conceals a lot of seasonal and regional variation. He suggested IIRC that on current estimates, a 3.5 degree global average increase corresponds to an 8 degree increase in winter temperatures in Southern California, with huge implications for water supplies derived from snowfall.

Anyway, back to my main point. The huge scientific uncertainty about the cost of inaction has obscured a surprisingly strong economic consensus about the economic cost of stabilising global CO2 concentrations at the levels currently being debated by national governments, that is, in the range 450-550 ppm. The typical estimate of costs is 2 per cent of global income, plus or minus 2 per cent. There are no credible estimates above 5 per cent, and I don’t think any serious economist believes in a value below zero (that is, a claim that we could eliminate most CO2 emissions using only ‘no regrets’ policies).

For anyone who, like me, is confident that the expected costs of doing nothing about emissions, relative to stabilisation, are well above 5 per cent of global income that makes the basic choice an easy one. Any agreement that comes out of Copenhagen or its successors will be better than no agreement.

A slightly trickier question is: what is the best target? I don’t have a good answer to this, but, given the politics of the process I don’t need one. The nature of such negotiations, with every country looking to shift as much of the cost as possible to others, ensures that there is almost no likelihood of getting an agreement that is too strong. In the present case, we can put some numbers on this. On the same kind of reasoning as I gave above, it seems clear enough that a 450 ppm target would be beneficial relative to a 550 ppm target. And, given the commitments and offers already on the table, the likelihood of anything stronger than 450 ppm is close to zero.

So, despite all the uncertainties, the policy position I would like to see Australia take to Copenhagen is clear enough. Aim for an agreement on a 450 ppm target, with emissions cuts on track for this until 2020 and with the capacity to revise later when we have more information. With all its imperfections, the currently proposed ETS (including a 25 per cent cut in emissions as part of a global agreement) is consistent with this position and therefore should be supported unless and until something better can be put in its place.

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  1. September 25th, 2009 at 02:39 | #1

    Just to clarify, are all these degrees in the post degrees Celsius or degrees Farenheit? 8 degrees C in Southern California seems like a huge change. There are some parts of Southern California where, IIRC, the difference between winter and summer temperatures is less than 8 degrees C.

  2. John Mashey
    September 25th, 2009 at 04:29 | #2

    Good discussion.

    As for explicit anti-science confusion generation, people might want to read just-published CLimate Cover-Up – The Crusade to Deny Global Warming, James Hoggan with Richard Littlemore. I’ve posted a review there.

    If stabilization costs x% for world GDP, for a few companies, there is a much larger impact on profits. It is worth a great deal of money to fossil fuels companies for people to keep investing in long-term assets that need fossil fuels. When oil (and later gas) production constraints start reducing supply, prices will rise, so that those companies can increase profits. People can trade in cars fairly quickly, but trucks last longer, and power plants last 30+years.

    That doesn’t happen so much if people reduce fossil-fuel demand over the next few decades via efficiency and substitution of other energy sources, which doesn’t happen overnight.

    Oil is too useful in too many ways: oil companies will sell all they can find, although the profits will vary greatly.

    Gas is far better than coal (less CO2/energy delivered, less other pollution), and it is interesting to see them promoting it versus coal with global warming arguments.

    But for coal producers, there is absolutely zero benefit for customers to worry about CO2…. and if I were one, I’d be trying to get a lot of coal plants built *now*.

  3. Michael of Summer Hill
    September 25th, 2009 at 07:34 | #3

    John Mashey, Copenhagen is not about business as usual for the world is going green and the old ways are a thing of the past.

  4. Hermit
    September 25th, 2009 at 07:37 | #4

    The best emissions path (CO2 graphed against time) would most likely be not too steep and would also be smooth without peaks and troughs. This is because humans need learning time to adapt and nature itself will tend to generate unexpected feedbacks. For example a smowmass failure could either boost demand for replacement dirty energy or perhaps reduce demand via regional loss of agricultural income. Delaying the start of the path means it has to be steeper to catch up.

    My feeling is that like the GST we could have been settled into the ETS had it started on 1/7/09 as originally planned. Even a simple $10 a tonne carbon tax (or ETS floor price) with no freebies would raise a lot of money for adaptation technology, assuming it wasn’t frittered away on dead ends like ‘clean coal’. That also means saying no to the conga line of groups who want special treatment. I don’t see how Rudd can come up with anything radically better than a simplified ETS. As they say when you have creative block go back to the thing you first thought of.

  5. Michael of Summer Hill
    September 25th, 2009 at 07:50 | #5

    Hermit, giving out free permits to the big polluters is not what I call good policy but having said that the CPRS is better than nothing.

  6. Glenn Tamblyn
    September 25th, 2009 at 08:22 | #6

    John

    “To explain this, think about the central IPCC projection of a 3.5 degrees increase in global mean temperature, which would imply significant but moderate economic damage (maybe a long-run loss of 5-10 per cent of GDP, depending on how you value ecosystem effects)”

    Referring to Brian’s query about Celsius vs Farenheit, if your comment is in Centigrade, I think it is way off; 5-10% of GDP is way too low

    An important form of uncertainty in all this is what the environmental impacts will be for any given temperature change. The response of the ecosystem and of our food production capacity to climate change is likely to be an extremely non-linear function of temperature. Some professional opinion on this is painting scenario’s of massive damage, and huge population crash by the end of the century. James Lovelock for example predicts a population of 1 Billion by 2100.

    At what level of risk and uncertainty for our grandchildrens future do we start to say that economic modes of thinking start to become inappropriate. If the population has crashed from 9 Billion to 1 Billion, we might still be able to talk abput GDP etc, but how meaningful would that conversation be.

    Could it be a bit like Mad Max discussing the GDP of the world he lives in?

    Your absolutely right about the limits of achievability of targets politically etc. But I feel the gulf between the threat we face and the level of engagement with it that is actually occurring is absolutely terrifying.

  7. TerjeP (say tay-a)
    September 25th, 2009 at 08:55 | #7

    Nuclear reactors, particularily generation IV, should be given there due as a potential no regret option. Although for PR reasons I’d rebrand generation IV reactors as “Nuclear Waste De-energisers” given that they reduce rather than enlarge existing stockpiles of nuclear waste.

  8. Michael of Summer Hill
    September 25th, 2009 at 09:24 | #8

    Glenn Tamblyn, tomorrow the climate will change and the temperature rise as the crowd sings ‘Up there Cazaly’. Gotta go.

  9. September 25th, 2009 at 11:22 | #9

    John, do you have any thoughts on Australia’s proposed “schedules” approach to a legal framework for a post-Kyoto agreement?

  10. Donald Oats
    September 25th, 2009 at 12:01 | #10

    It is depressing that there is much more coordination now with the professional denial crowd – even the Australian Letters page hits 90% or more on anti-AWG letters, or anti-ETS letters. The Australian has gone feral on the AGW topic.

    I think if economists and other numerate professionals are to succeed in making a case for rapid industrial change in the energy sector, they will need to find some good analogies that help explain why the scientific uncertainty implies the need for faster, more agressive action, rather than the sedate actions up to now. The sedate actions over the course of the last 30 years or so have set us up for a more disruptive change, rather than less disruptive. The risks have increased quite significantly precisely because we have been hoodwinked into a slow as she goes approach over the last 30 odd years. Each decade has brought changes in global climate, and latitudinal climate, which mesh in with the dominant theory of the present influence of humans.

    Politicians seem to like advice from economists better than scientists, so hopefully a few more have moved their stance closer to yours (Pr Q).

    Question: What other issues have been looked at from a risk perspective – has population growth had any discussion?

  11. September 25th, 2009 at 12:21 | #11

    TerjeP at 7: Your faith in Generation IV nuclear reactors is well known. However, as I understand it, none has actually been built and generally none is expected to be available until around 2030.
    Certainly the experience with some of the nuclear power plants being built now does not give rise to confidence in the claims for the theoretical Generation IV nuclear reactors.
    For instance, the 1600 MWe European Pressurized Reactor (EPR) reactor is being built at the Olkiluoto Nuclear Power Plant, Finland. Originally, a joint effort of French AREVA and German Siemens AG (which has since pulled out) , it will be the largest PWR (pressurised water reactor) in the world.
    However, a repport commissioned by the German Federal Ministry of Environment, Nature Conservation and Reactor Safety reported that as of August 2009, the project was “more than three years behind schedule and at least 55 per cent over budget, reaching a total cost estimate of €5 billion ($7 billion) or close to €3,100 ($4,400) per kilowatt”.

  12. Fran Barlow
    September 25th, 2009 at 12:32 | #12

    @Donald Oats

    the Australian Letters page hits 90% or more on anti-AWG letters, or anti-ETS letters. The Australian has gone feral on the AGW topic.

    That’s a dangerous strategy for them in marketing terms because most people think the view of the paper is the view of the letters page, and this is going to shift the reader demographic away from the poeple those expensive display ads have to reach.

    It has been at least 25 years since I decided that if the SMH wasn’t available I’d be better off with no newspaper at all. The paper was a rag too tatty to use for wrapping chips then and now it’s not quite as good.

  13. Freelander
    September 25th, 2009 at 13:17 | #13

    @Fran Barlow

    Until people finally stop buying The Australian, Rupert is not going to take any notice and whether readers agree with the content or not, if they are buying it, The Australian will remain a good vehicle for their expensive ads.

    The way to punish The Australian for its denial, sorry, skeptic stance is to boycott it. Don’t buy it and if you have to read it read it online, but even then they can get some advertising revenue.

  14. TerjeP (say tay-a)
    September 25th, 2009 at 13:30 | #14

    JohnL – many of the technological components that would be used in an IFR reactor (liquid sodium heat exchange, fast breeder reactor etc) exist within the Russian BN-600 reactor which went into service in 1980 and is still operating today. An IFR mainly involves some innovation in onsite fuel reprocessing and it’s not really that exceptional.

    The leap of faith is that IFRs would deliver cheaper electricity than coal fired power plants. This is the leap that would need to be crossed if it was to be a no regret option. However if you pitch it against renewables such as solar and wind it is not hard to see the nuclear option as being better value. Add up the alternate costs of dealing with nuclear waste stockpiles (ie storing them rather than using them as fuel) and IFR style reactors look like a really great long term prospect that answers nearly all contemporary environmental concerns associated with energy production.

  15. Hermit
    September 25th, 2009 at 13:32 | #15

    @JohnL
    The dispute between Areva and the Finnish clients has gone to arbitration
    http://uk.reuters.com/article/idUKLV55678920081231
    with work progressing nonetheless. It seems a bit like fining the umpire for slow play with both sides blaming each other for delays. That build time is unacceptable if we are to retire coal burning power stations. The Chinese appear to be showing the way with fast construction techniques
    http://nuclearaustralia.blogspot.com/2009/08/modern-nuclear-plant-construction.html
    and no doubt there will be increased use of prefabricated components.

  16. Fran Barlow
    September 25th, 2009 at 14:48 | #16

    @Freelander

    What would be better that not buying it would be picking out the display ads (especially those near op ed) and writing en masse to them explaining that we mean to discourage everyone we know from supporting their business while they are supporting The Australian, and encouraging a viral marketing campaign against them as they are contributing to the despoliation of the planet.

    If the business in question has a formal policy of supporting the fight to mitigate climate change, this should be specifically cited and contrasted with their sponsorship of scientific agnotology.

  17. Fran Barlow
    September 25th, 2009 at 16:05 | #17

    For the record Pr.Q I thought your reasoning above was sound. Aim for tracking 450ppmv by 2020 with options to go harder when more data comes in.

    I’d also like to see an incentive scheme for jurisdictions that exceeded their obligations within the target by more than 1%, paid perhaps out of an indemnity fund to which each party contributed on an annualised basis derived from historic emissions and the extent of any shortfall on the progressive target each year.

    Since you’d have to be a party to the agreement to qualify and actually have a target, this could get around the fugitive emissions problem, as well as arguments about offshoring.

    If everyone beat the 450 tracking line by 2020 by more than 1% and there were no funds to distribute because everyone had done the right thing then the problem takes care of itself.

    As to the target itself, I think 450ppmv is too high. We really ought to be trying to stabilise much closer to 400 and therefore doing it right now and aggressively, while attempting reforestation, massive algae-based sequestration etc so that perhaps by 2100 we could have concentrations in sharp decline but I accept that that is simply not going to happen.

  18. September 25th, 2009 at 16:14 | #18

    TerjeP at 14. Thank you, but I think it is still true that most experts do not expect a Generation IV nuclear power station to be in operation before around 2030.

  19. TerjeP (say tay-a)
    September 25th, 2009 at 16:36 | #19

    Quicker if you think the way they did during the Manhattan Project. All they would need to do is divert funding from the Yucca mountain nuclear waste repository or from the many green handouts to the car industry and/or other green electricity initiatives. Or else provide a favourable regulatory framework and let the private sector do it.

  20. Alice
    September 25th, 2009 at 18:19 | #20

    @Fran Barlow
    Donald – the Australian and its engagement with the AGW lunatic fringe is nothing more that Custers last stand.

  21. Alice
    September 25th, 2009 at 18:20 | #21

    oops – I hit the wrong reply button

  22. Michael of Summer Hill
    September 25th, 2009 at 19:47 | #22

    TerjeP (say tay-a), JohnL is correct Fourth-generation reactors are still at the conceptual stage and no evidence exists to suggest they will be operational before 2020.

  23. September 25th, 2009 at 22:31 | #23

    TerjeP at 19: Everything you say also could be applied to developing an effective coal sequestration program long before 2030. This is as likely as Generation IV nuclear power stations being operational.
    Mind you, I find your faith in the private sector is touching, if somewhat misplaced. The Finland experience does not engender confidence in the private sector.
    On your point about a favourable regulatory framework, the Energy Policy Act of 2005 in the US provided a generous tax credit for nuclear power until 2015.
    In an updated report in March 2007 on on “Nuclear Power: Outlook for New U.S. Reactors” , the Congressional Research Service (CRS) says on page 12: “Because it is generally believed that Wall Street continues to view new commercial reactors as financially risky, the availability of federal loan guarantees could be a key element in attracting funding for such projects and reducing financing costs. The federal government would bear most of the risk, facing potentially large losses if borrowers defaulted on reactor projects that could not be salvaged. Loan guarantees may be especially important for nuclear projects undertaken by deregulated generating companies as opposed to traditionally regulated utilities, which can recover their regulator-approved capital costs from ratepayers. Even for regulated utilities, ‘loan guarantees are critically important to new nuclear plant financing,’ the Nuclear Energy Institute contended in September 2006 testimony (Testimony of Skip Bowman, President and Chief Executive Officer, Nuclear Energy Institute, to the Energy and Water Development Subcommittee of the House Appropriations Committee, September 13, 2006).
    The CRS report continues: “Without the production tax credit contained in the 2005 Energy Policy Act, a nuclear facility is not competitive with either coal-fired or natural gas-fired facilities under base case assumptions. Based on the assumptions above, CSR estimates that the break-even point for nuclear power capital costs versus coal-fired facilities initiated in 2015 is about $1,370 per kilowatt (kw) of capacity. This is substantially below the EIA (Energy Information Administration, a section of the US Department of Energy) projected cost of $1913 per kw and is even below the vendors’ estimate of $1,528 per kw (2004). Under base conditions, it seems unlikely that a new nuclear nuclear power plant would be constructed in the United States, barring a sustained, long-term increase in natural gas prices and the creation of a substantial, mandatory greenhouse gas reduction program that would increase coal-fired and natural gas-fired generating costs.”
    I am not too sure what you mean about the Yucca Mountain repository project.
    The Nuclear Waste Policy Act of 1982 (NWPA, P.L. 97-425) committed the federal government to providing for permanent disposal of spent fuel in return for a fee on nuclear power generation. However, the schedule for opening the planned nuclear waste depository at Yucca Mountain, Nevada, has slipped far past NWPA’s deadline of January 31, 1998. Earier, the DOE (Department of Energy) had hoped to begin receiving waste at Yucca Mountain by 2017.
    However, the Obama Administration has announced Yucca Mountain will no longer be considered the answer for US civilian nuclear waste.

  24. September 25th, 2009 at 22:45 | #24

    John,

    Could you answer my question about “2 per cent of global income” means?

  25. jquiggin
    September 25th, 2009 at 22:49 | #25

    @David Kane I always use “income” in preference to GDP, since the latter concept conveys an air of spurious precision (and of course, the D is silly in a global context). Does “a 2 per reduction in the level of global GDP, relative to no action (and disregarding benefits of mitigation)” answer your question.

  26. Freelander
    September 25th, 2009 at 23:10 | #26

    @Fran Barlow

    Very good idea! Hit Rupert where it hurts.

  27. September 26th, 2009 at 01:59 | #27

    Perhaps I am being dense, but I am always confused in these discussion as to three different interpretations of 2% in this context? Call world income today $60 trillion. Three options:

    1) One time cost of 2%, meaning $1.2 trillion.
    2) Annual cost of $1.2 trillion (which becomes less important as we become richer).
    3) Cost is 2% of global income each year. So it is $1.2 trillion this yeat, $1.23 trillion (or whatever) next year and so on.

    Apologies if this is obvious to everyone else.

  28. John Mashey
    September 26th, 2009 at 05:01 | #28

    @Michael of Summer Hill
    Does this mean that coal is a thing of the past in Australia?
    That is news to me, but I’m glad to hear it.

  29. John Davidson
    September 26th, 2009 at 23:44 | #29

    The current CPRS introduction plan means that it will be at least 2012 before CPRS starts producing real reductions in emissions. So if we are really serious about urgent climate change action we should put CPRS to the side till at least 2020 and take direct action on the big ticket emission items for which there are commercially available solutions. There is no reason why at least the following action cannot be in place before the next election:
    1. Set up a series of contracts for the supply of clean electricity.
    2. Ditto for the conversion of coal fired power stations to gas fired.
    3. Ditto for the reduction of net emissions in general. (Allows room for proposals such as charcoal sequestration.)
    3. Announce that regulations will be introduced that will limit the average fuel consumption of new cars to 5 litres/100km starting Jan 2010 with the limit ramping down to one litre/100km by 2020.
    4. Expand current programmes and introduce new programmes to encourage small scale efforts to reduce net emissions.

    The size of the contracts should be large enough to ensure that total fossil carbon related emissions will be reduced by at least 30% by 2020.

  30. Brian Bahnisch
    September 27th, 2009 at 01:56 | #30

    I like the line of argument in the post, but let’s pause for a moment and consider the adequacy of a 450ppm target.

    Back as far as the Stern Review (Executive Summary, Figure 2, 2006) we were told that 450ppm means a 50% chance of exceeding 2C, which, frankly, is dangerous. The same graph gave us a 5% chance of exceeding 3.8C which is near the threshold for the end of civilisation as we know it.

    Those calculations were in terms of short-term “Charney” feedbacks only. Double it if you take James Hansen’s stuff seriously.

    The next thing to consider is whether a 60% reduction by 2050 will get us to 450ppm or into overshooting. If we overshoot, that implies net negative emissions later.

    Well might we research and revise as we go!

  31. Fran Barlow
    September 27th, 2009 at 10:48 | #31

    And just to support your point

    @Brian Bahnisch

    unless we prevent substantial decomposition of Arctic permafrost — (plus 1degC for that) we get a feedback that makes our 60% reduction moot. So our interim target has to focus on stabilising as close to 400 (if not lower) as possible.

  32. carbonsink
    September 27th, 2009 at 18:47 | #32

    I was at a conference on uncertainty and climate change in Berkeley last week…

    What? ProfQ isn’t videoconferencing anymore?!

    I’m sorry, but flying half way around the world to gasbag about climate change is the very height of hypocrisy. All climate change conferences should be insist on videoconferencing for any delegates who have to travel more than a few hundred kilometres. If the organisers of such conferences can’t do this simple thing, what can we expect of the rest of society?

  33. Stephen Gloor (Ender)
    September 29th, 2009 at 10:23 | #33

    @TerjeP (say tay-a)

    “Quicker if you think the way they did during the Manhattan Project.”

    And exactly could be said of Concentrating Solar Thermal with storage. A Manhattan project style rollout of CST could almost completely replace coal in a shorter space of time than nuclear, GENIII or GENIV.

    Do not be deluded by Peter Lang’s false analysis and Tom Blee’s false promises. GEN IV in not in production anywhere in the world nor has the industrial process to reprocesses the fuel been demonstrated in anything other than laboratory conditions. GEN IV has more than one technological barrier to overcome and is at least 20 years away from even a pre-production prototype of a complete IFR. Also I am not against GEN IV nuclear as I fully support the LFTR style reactor and would welcome its deployment to process existing spent nuclear fuel however this would be only in the framework of a mainly renewable solution

    CST with molten salt storage is, by contrast, in pre-production right now at Solar Tres after a completely successful lab scale project called Solar Two that demonstrated all aspects of molten salt as a working fluid and 10 hour storage. With a small amount (less than 10%) of supplemental fuel CST power plants are not intermittent and can replace baseload power plants. They can be rolled out much faster than nuclear and will be a far better solution than nuclear will ever be

  34. Freelander
    September 29th, 2009 at 10:45 | #34

    @carbonsink

    I like the inconsistency of those who deny climate change. On the one hand they argue that even if it were true, it would be pointless for any individual country to do anything as it wouldn’t make any difference BUT they then turn around and criticise individuals who believe climate change is real for not trying to save the world from climate change by relying on simply changing their own behaviour. So a country makes no difference at all, but one individual not hopping on a plane will make it all go away. What is worrying is that this type of thinking seems to be achieved without resort to drugs.

    My view is that it is increasingly looking as though we may have left it too late, so I intend to do all the air travel I can before the eventual desperate attempt to save the unsaveable.

  35. Robert Merkel
    October 1st, 2009 at 16:04 | #35

    John, one point neglected in the costs and benefits of mitigating greenhouse gases is that in the process you clean up a lot of associated pollution.

    Even in Australia, pollution associated with vehicular emissions costs billions of dollars annually. The costs in more heavily polluted places like China must be gargantuan.

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