Now that nearly everybody (except US Republicans, of course) accepts the scientific evidence on global warming, the problem is to determine the best available response. As I’ve argued before, the main obstacle to action is the belief that we can’t protect the environment unless we are willing to accept a radical reduction in our standard of living.
Most of the arguments along these lines recently have been coming from anti-environmentalists, including some economists. We can add to the list Robert Samuelson who says
The dirty secret about global warming is this: We have no solution. About 80 percent of the world’s energy comes from fossil fuels (coal, oil, natural gas), the main sources of man-made greenhouse gases. Energy use sustains economic growth, which — in all modern societies — buttresses political and social stability.
Samuelson’s claims are notably lacking in any reference to supporting evidence beyond his gut feelings. The great majority of economic analysis suggests on the contrary, that market economies are entirely flexible enough to deal with an increase in the cost of any one commodity (in this case, the effective social cost of CO2 emissions) and that the cost of stabilising global CO2 levels at 550 ppm will be in the range of 1-3 per cent of GDP.
Unfortunately, the recent suggestions by Tim Flannery and Bob Brown that Australia should close down its coal industry only go to reinforce the claims of people like Samuelson. It’s notable that the Oz, which is trying, like others, to switch from outright denialism to a phony pose of moderation, jumped on these comments with glee.
There does seem to be, in parts of the Green movement, a “hair shirt” feeling that unless policy requires painful sacrifices, it can’t be doing any good**. So, we get opposition to the use of offsets to neutralise emissions, and a reluctance to look at possible options like carbon sequestration. Reader Robin Green raised this point with me in a lengthy email which I’ll quote a bit
Our intuitions may deceive us here. My crucial point is that while, greens are quite right to say that, for example, reduction is better than recycling, because it involves less energy and waste, not taking a flight should actually be equivalent (apart from network effects) to taking a flight and properly neutralising it – and should be seen as such, if we can work out the other problems I mentioned.
Hair-shirted arguments that “we MUST fly less” are likely to be seen as deceptive, and are likely to make some readers “throw the baby out with the bathwater” and switch off, in my view. This a great shame, because offsetting has great potential.
Far better that this hair-shirtism, surely, would be compulsory carbon neutralisation of all flights – spreading the burden equally, and increasing the incentive to develop more efficient ways of offsetting
There’s still plenty of doubt over whether emissions trading will work, and plenty of problems to be resolved. The same is true for CO2 sequestration, solar power, safe nuclear power, big improvements in energy efficiency, and all the other options we have to stabilise climate. But improvements in any of these directions will make us all better off. Neither a hair-shirt hope that nothing but drastic cuts in living standards will work nor a “what I have, I hold” insistence on doing nothing different from what we are doing now is going to be helpful here.
* Meanwhile, the Stern review has performed the useful service of showing how few people actually understand discounting. Here’s Samuel Brittan who imagines that the (almost) century-old neoclassical theory of interest developed by Ramsey and Fisher depends on new-fangled ideas about happiness studies.
** It’s not only Greens to whom this kind of thinking appeals. You can see a fair bit of it in certain economic rationalist circles (not all) when discussing economic reform, or in Austrian-influenced discussion of recessions.
John Quiggin 
An emissions trading scheme that produces the same effects as a 1970s oil-price shock is probably not the kind of emissions trading scheme our politicians had in mind 🙂 BTW, what percentage of national income did the oil shocks of the 1970s cost?
What has happened swio is those early adopters of the theory of GW are still pointing accusing fingers at the early skeptics and denialists. Their problem now ironically enough, is that they are in denial themselves as to the costs of remedial action and in any case whether there is any point to it, if any national sacrifice is simply squandered by others internationally.
If you don’t think people who believe in 1-3% cost to GDP to reduce GG to 40% of their 1990 levels mantra target are in denial, ask yourself why in God’s name so many govts around the world haven’t beaten a path to their prescription door. Why wouldn’t John Howard make a nice guy of himself with the punters for that paltry cost eh? While you’re at it, you might like to find a country that currently enjoys per capita GG emissions that are 40% of Australias per capita emissions in 1990. If you do, I’ll bet you all the tea in China, noone’s risking the lot in leaky boats or the like to get there.
For boofheads with short memories, let me jog the neurons just a little bit. Been to a flea market and seen all the hand saws, hand drills, brace and bits to give away? In the building game nowadays if it doesn’t go in with a cordless driver or a nail gun then it must need welding. They don’t dig footings and plumbing with picks and shovels for one and six a foot either. Seen all those strange bobcats, mini-excavators, ditch witches, directional drilling machines, backhoes, etc? Apart from brickies mortar, they don’t shovel sand, cement and gravel into concrete mixers anymore. Have you taken any notice of those funny rotating barrels on the back of big trucks coming out of the batching plants lately? And when they get to site the big truck with those pipes to pump it all around? Wheelbarrows you say? Streuth, they haven’t reduced bagged products to 20kg just for OHS these days. It’s because you can’t get this generation to lift what grandad did anymore. (seen anyone lifting hay bales, wheat bags or even your rubbish bin lately?) The remote control generation is why there’s such a shortage of tradesemen these days. Besides they’re all off listening to the likes of JQ telling them how simple it will be to save the planet and still enjoy the good life.
Time to state my own conclusions to date. GW is upon us and remedial action is needed and soon. That will have a very large impact on our material well being and as such it will be impossible not to address the concomitant equity problem. Further, in the likely absence of international agreement and cooperation on remedial action, any proposed remedy by one country or a group of countries would need to bring inexorable pressure to bear on the others to follow suit. We need a vanguard country and what better than ours eh? After all we ate the GST reforms for breakfast.
“f you don’t think people who believe in 1-3% cost to GDP to reduce GG to 40% of their 1990 levels mantra target are in denial, ask yourself why in God’s name so many govts around the world haven’t beaten a path to their prescription door.”
Observa, this and your next comment suggests you really haven’t been paying attention. Australia and the US are laggards here. All other countries of any significance have ratified Kyoto, and the EU is already pushing for a 60 per cent reduction, and implementing policies that are (admittedly initial) steps towards reaching it. Once the US comes on board (about March 2009) we will be left like a shag on a rock.
The oil shock was a consequence, not a cause of the macroeconomic disruption of the 1970s. The crucial event was the collapse in 1971 and 1972 of the Bretton Woods system in the face of high inflation. This inflation eventually (1973 and 1974) spilled over into commodity prices. There were some second round macro disruptions from the recycling of petrodollars, bad loans and so on.
So, the economic costs of higher oil prices per se were modest. The assumption that energy is central to a modern economy is a myth that is almost impossible to dispel. Of course, energy inputs are essential, but the same is true of labour, capital land, water and every other factor of production. As Stephen Bartos points out above, information is what matters in the end.
JQ, regardless of whether cause or consequence is there any economic analysis of the costs of the oil shocks themselves?
As you say, energy may not be central (and is becoming less important) but it is still essential. Oil in particular is essential with no obvious substitutes on the horizon. This notion put forward by many economists that we will easily transition from oil to some future energy source just as we did from wood to coal to oil, is nonsense. Despite what economists believe, energy will not be magically created just because the price is right. What matters ultimately is net energy — if it requires more energy to extract the fuel than the fuel produces, no-one will make the investment.
Carbonsink, there is essentially unlimited (if expensive) solar energy available to us, even after netting out energy embodied in production. So, economists are exactly right in saying that energy will be created if the price is right. Of course, prices have another magical-seeming effect. If the price is high enough, uses of energy that seemed to be essential will be found to be dispensable.
My guess is that solar is not going to be the cheapest option (taking emissions costs into account) for some time to come. But the cost of going solar across the board (large in absolute terms, but small relative to GDP) provides an upper bound showing that the problem can be solved without destroying the economy.
Taken to its logical extreme you are correct, but we are very, very long way from running our economy on exclusively solar energy. It would require (among other things) electrification of our transportation infrastructure, and a solution found for base-load power which solar cannot currently provide. Sure, we may get there given a lot of time, but climate change and oil depletion may mean we don’t have that luxury.
jquiggan – “So, economists are exactly right in saying that energy will be created if the price is right.”
Energy cannot be created. Economics can create energy converters to convert forms of stored or available energy to other more useful forms. Right now the car you drive cannot use solar energy except stored solar energy that has been refined into a form, petrol, that your present car can use. A car sitting around in the sun will not work no matter how much money you throw at it. If you spend money on a different energy converter and convert your car to run on solar power, that is not creating energy. It is just using a different type of energy converter – an electric motor, batteries and solar panels instead of a oil well, oil refinery, petrol station, gas tank and internal combustion motor.
If one or more elements of the energy converter are not available for whatever reason and you lack the expertise or cannot get the expertise to create it then all the money in the world will not create the energy converter. So economics cannot create energy.
What JQ is saying is that if the price of energy is high enough then renewables (essentially inexhaustible engergy sources) become economically viable, and the investment to develop these energy sources will follow. Thus energy is “created”.
As JQ says, this is the upper bound of the problem. Once renewables are viable, the economy will “create” all the energy it needs (a worrying thought in itself). The question remains, can we get there with the minimal economic pain (1-3 per cent of GDP) as JQ suggests? I suspect the answer lies in how fast we have to make the transition.
Perhaps my biggest argument with the market-will-provide-when-the-price-is-right premise, relates to oil substitution. Standard economic theory says that once a commodity becomes too scarce or too expensive it will be substituted for another. IMO, this falls down with oil. All of the possible substitutes have serious problems wrt climate change (biofuels, tar sands, coal-to-liquids). Of course, in the distant future we could electrify transport and run it on renewables, but that would cause massive economic upheaval if it had to happen quickly (less than 3 decades). In fact, there are some modes of transportation (such as jet-powered aviation) for which there are no viable substitutes for oil, no matter how high the price.
Ultimately physics trumps economics whether economists like it or not 🙂
Keep it civil, carbonsink.
Ender, thanks for the correction, but this doesn’t get you very far. Since the total quantity of energy in the universe never changes, this cannot be a relevant variable in any decision we make. Of course, as you say, what matters is usable energy, and there are no binding physical limits here.
“If one or more elements of the energy converter are not available for whatever reason and you lack the expertise or cannot get the expertise to create it then all the money in the world will not create the energy converter.”
If I replace “energy converter” with “house” or “Pepsi-Cola” or any other good you care to name this statement is equally true. So, economics cannot create usable energy, except when it can.
jquiggan – “If I replace “energy converterâ€? with “houseâ€? or “Pepsi-Colaâ€?”
No because a house is not an energy converter. The economy is based on energy conversion. You can have energy without a house but not a house without energy. A human building a house by hand is using plants as an energy converter to generate energy assemble a house.
So why did Roman economics not develop fossil fuels? They certainly has a lot of money and a huge economic system so therefore as their civilisation approached the limits of water power their economy should have created fossil fuel energy converters. If economics can create energy why did it no happen then? I am sure as available streams etc were exploited the price of water power must have increased so by your reasoning when the price got high enough the Romans should have invested their money into coal power.
So what am I missing?
“The economy is based on energy conversion.”
This is begging the question – that is, assuming what you are supposed to be proving. Of course energy is essential but so are water, air, labour, land, information, mineral resources and so on. All of these are in finite supply, and supply and demand for all them is driven by economic forces. There is nothing special about energy.
As regards the Romans not exploiting coal, in fact they did. But it’s dirty and difficult to handle, so in the absence of a lot of associated innovations people preferred to use wood (first converted to charcoal for many purposes). When wood became scarce in Britain, coal was used as a substitute. Over time, with improved furnaces and so on it became the preferred source of energy.
There’s an exactly similar story with natural gas, which used to be burned off as a nuisance associated with the extraction of oil.
Thanks – will have a think about it.
“Observa, this and your next comment suggests you really haven’t been paying attention.”
OK, that point was a bit sloppy, because the demands on signatories to Kyoto are sloppy too(try India). Put it another way. Basically there are more people (via their govts) that want to relieve the guilty guzzlers of fossil fuels(MDCs)of their guilt faster than the guilty can dispose of it. That’s probably because this guilt declines with declining GDP, but there are the new denialists who don’t think so, or rather, prefer to believe the question won’t have to be asked of them.
JQ, I’m aware that the energy sector is declining as a percentage of GDP in modern economies. I’m aware of Simon-Ehrlich wager that suggests that in the long run commodity prices decline. But I can’t shake the feeling that we’re heading for a disconnect in the energy sector where all the old rules get thrown out the window … and frankly when economists tell me “the market will provide when the price is high enough”, it gives me very little comfort. It strikes me more as an article of faith than anything else.
Nothing illustrates this disconnect more than the aviation industry. Currently passenger numbers are booming, airports are being expanded around the world, flights seem to get cheaper and cheaper, but how can this possibly continue in a carbon-constrained and oil-depleted world? You can’t fly jet planes on solar, or biofuels or hydrogen. There is simply no substitute for kerosene. Nothing else has the same energy density and stability across a range of temperatures.
How will the market provide an alternative to kerosene?
Regardless of what we do about global warming, it seems unlikely that the trend to ever-cheaper air travel can continue, given that the price of oil seems set to rise. There are some adjustments that can be made. For example, most discussion of the Airbus A380 focuses on all the room for lounges, bigger seats and so on. I suspect we’ll see them packed as tight as existing jumbo jets soon after they come into service, which will make them considerably more fuel-efficient per person.
But the point I’m trying to make is that there is a huge difference between “we can’t go on exactly as before” and “we will experience a sharp decline in our standard of living”. Some things will get dearer, others will get cheaper, overall we will be marginally worse off than if the problem magically disappeared.
Prof. Quiggin’s rough estimate of the cost of the IEA’s “Alternative Scenario� for energy production and use concludes “…we’re looking at initiatives that are an order of magnitude less costly than those being discussed in serious analyses of the problem�. This actually looks like still being an overestimate of costs of the Alternative Scenario (World Energy Outlook 2004, Ch.11), because the IEA estimates the net global costs of their set of alternative policies as zero. This is because they project that reduced generation costs in non-OECD countries would roughly equal increased demand-side costs in OECD countries. This doesn’t mean that financing wouldn’t be a problem, particularly for non-OECD countries, but is is a zero-net-global-cost projection.
And for OECD countries, projections of CO2 emissions in the Alternative Scenario reach a turning point at about 2020, then start to decline. The projection horizon is only 2030, so no estimate of 2050 emissions is given (the Blair Govt. for example has a target of 60% reduction in CO2 emissions below (I think) 1990 levels by 2050). Projections for developing countries are poorer, with CO2 emissions continuing to rise thoughout the projection period, but more slowly than under the Reference Scenario.
So this zero-net-global-cost Alternative Scenario won’t solve all our problems, as I said in my earlier comment, but it goes some of the way and projects a turning point in emissions – at least for OECD countries. That is very important. Now if we spend some real money…
Air travel is at the sharp end of the global warming problem, primarily because its monumentally damaging to the atmosphere (10 tonnes of CO2 emitted for a return trip to Europe). Despite this the long term trend is for cheaper air travel. Something has to give. Either the long term price trend reverses dramatically, or some low-emission renewable alternative to kerosene magically appears.
Cramming a few more bums onto an A380 is not going change any of this.
If there’s one thing any of us can do to reduce GHG emissions it is: Don’t take that flight. I can see a time in the not too distant future when flying will be as socially unacceptable as drink-driving is today.
BTW, the idea that you can offset a flight to Europe by planting trees is preposterous. A large tree will absorb around one tonne of CO2 over its lifetime. Say the tree lives 50 years, that’s 20kg of CO2 per year. If you fly to Europe once a year you would need to plant 10,000 / 20 = 500 trees every year.
So I think the problem is more than “Some things will get dearer, others will get cheaper”. While we may be marginally worse off in economic terms, there may be things we simply cannot do any more, like fly around the world, or commute 100kms to work every day, or heat the swimming pool through the winter.
Tupolev believes it answered your question by actual demonstration back in 1988 carbonsink (you’ll be relieved to hear 🙂
Those crazy Russians 🙂
Both Hydrogen and LNG have a much lower energy density by volume than kerosene:
Liquid hydrogen: ~8 MJ/L
LNG/LPG: ~22 MJ/L
Kerosene: ~33 MJ/L
These are fundamental physical limitations that cannot be overcome by economists 🙂
Both liquid hydrogen and LNG require very large, very strong tanks that must withstand huge differences in air pressure and temperature. Because the tanks are larger the planes will have to be larger producing more drag, which means the planes will have to fly at higher altitudes. Problem is, burning hydrogen produces 2.6x as much water vapour as buring kerosene resulting in larger contrails, which are known to trap heat in the atmosphere, particularly at night.
There are road blocks everywhere you look. That’s why those crazy dudes at the IPCC concluded:
carbonsink – “There would not appear to be any practical alternatives to kerosene-based fuels for commercial jet aircraft for the next several decades.”
The sensible answer is to restrict air travel. The very very dirty option is to use coal to liquids.
http://featured.matter-mag.com/2006/11/can-coal-clean-transportation-fuel.cfm
Now which solution do you think will be chosen?
Obviously coal-to-liquids. There is not a politician in the world with the courage to say you can’t fly anymore, or make it so expensive than only the super rich can fly. Its taken 30 years for air travel to become accessible to (almost) everyone. What politician in their right mind is going to reverse that trend?
This is what bugs me when people tell me the adjustment will be easy — just a few percent of GDP — sounds nice and painless doesn’t it, but that doesn’t reflect the fact that the aviation industry really needs to shrink to a fraction of its current size.
Of course, some will say we’ll keep flying and keep using kerosene, but that means even deeper cuts in other sectors, as if a 60% reduction 1990 levels wasn’t ambitious enough.
I have just been reading the link posted by Ender: “CLIMATE: Making Sense and Making Money” I highly recommend checking it out. carbonsink asked : “BTW, what percentage of national income did the oil shocks of the 1970s cost?” I’m not sure what the answer to that question is but C:MS&MM states (p. 9):
A recent study by Barclays Capital seems to arrive at similar conclusions. I havent been able to find it on the web, but check out:
http://news.independent.co.uk/business/news/article2248811.ece
When environmental measures such as reducing lead in petrol, CFCs, SO2 etc have been flexible, they have cost less than expected and provided unforseen opportunities. There are likely to economic benefits from the efficiency improvements caused by a carbon price signal, but it is hard to predict how much they will be, and how much they will balance the costs associated with reducing emissions. This will probably make it harder to estimate a carbon price from an emissions cap in a cap and trade scheme. The carbon price in the EU Emissions Trading Scheme has now slumped to 1.50 Euro, becuase the cap was too high. The lavel of the cap proposed in the National Emissions Trading Taskforce Discussion paper (the state based one) may repeat this mistake – it is not very different from BAU in the first few years. If other market barriers and market failures which prevent energy efficiency are addressed, then the carbon price will be lower, and global warming mitigation will be cheaper.
It may be that Australia will have to reduce its GHG emissions by more than 60% by 2050 if we are to cooperate in achieving a stabilisation level of 550 ppm CO2-e. Countries with high per capita emissions will probably need to reduce their emissions more than countries with low per capita emissions. If Australia was to reduce its emissions by 60%, they still will only be marginally lower per capita than present per capita emissions in the UK. The Stern Review (p. 474) cites a study by Hohne et al which looks at various options for a global framework for reducing greenhouse gas emissions.
The study discusses four options for different countries to reduce greenhouse gas emissions, it does not provide figures for Australia, but does for the United States, which also has high per capita GHG emissions. The results for the US are emissions 20-40% less than 1990 levels in 2020, and 70-90% less than 1990 levels in 2050. This is for a 450 ppm CO2 concentration, which corresponds to somewhere around a 550 ppm CO2 equivalent concentration. If we want to mitigate more of the low temperature increase effects of climate change, such as severe coral bleaching of the Barrier Reef, we will probably have to aim for a lower stabilisation target than 550 ppm CO2-e.
My preferred way for Australia to mitigate climate change would be for an emissions trading scheme and complementary measures for dealing with domestic emissions, and a carbon tax on coal exports, which will perhaps be somewhere around $5.90 per tonne CO2-e. If Australia can provide effective emission reductions, and reduce coal exports through a price signal, we will be setting a good example. If we can also achieve some economic benefits through efficiency increases, others may even want to imitate us.
[…] economist John Quiggin has examined climate change issues for some time. As he says in his latest post: There’s still plenty of doubt over whether emissions trading will work, and plenty of problems […]