John Quiggin

While Australia has been transfixed by the meltdown of the Liberal party, there have been a string of positive developments around the world, which make a positive outcome from Copenhagen, leading over the next year to an intermational agreement to limit greenhouse gas emissions, much more likely than it seemed two years ago, or even six months ago. Among the most important developments

* Obama’s commitment to a 17 per cent (rel 2005) target, which essentially puts the Administration’s credibility behind Waxman-Markey
* China’s acceptance of a quantitative emissions target, based on emissions/GDP ratios, but implying a substantial cut relative to business as usual
* The change of government in Japan, from do-little LDP to activist DPJ
* EU consensus on the need for stronger action
* Acceptance of the principle of compensation for developing countries, and acceptance by countries like India that they should take part in a global agreement and argue for compensation
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The Great Ute Scandal has been bubbling along for weeks but I ignored it, partly because scandals are rarely interesting and partly because I couldn’t get to the starting point of working out what wrongdoing was supposed to have taken place (compare for example the Manildra business, which involved large sums of public money and provoked no serious concern). But in the last day or two the stakes have been raised dramatically, based on the alleged email from the PM’s office urging a prompt response to the concerns of a car dealer who contributed a car to Rudd’s campaign.

Whatever the significance of the putative email may have been, Rudd’s outright denial that any such email was sent means that it will be a major crisis for him if the email turns up, and possibly a terminal one if it turns out that the email was suppressed. On the other hand, if it can be proved that the email published by the Telegraph and referred to by Turnbull was in fact a fake, the consequences will be dire for Turnbull at least (I don’t suppose the Tele could lose much credibility). As my recent spam crisis demonstrates, I’m no tech expert, but I would have thought that the headers on an email would make it pretty easy to check whether it had been sent and that erasing all trace of an email would be just about impossible. And it would be grossly irresponsible to publish an alleged email if you received it with the identifying info removed.

Update

The news that the email was a fake confirms that the outcome will be bad for Turnbull, and could be catastrophic. The worst case, but a plausible one on the evidence to hand, is that the email was the product of a fraud cooked up between Liberal staffers and one or more corrupt Treasury officials. Even the best case, that the email was fabricated for some personal reason, and passed to the Liberals along with other leaks about the car scheme, doesn’t look good. I guess, given the twists and turns so far, it’s also necessary to consider the Machiavellian possible of a (highly successful) agent provocateur, luring Turnbull into a trap, as happened (IIRC) with Ralph Willis in 1996.

Further update

It now appears that the worst-case scenario is pretty close to the truth. Grech has apparently been working as a source of leaks to the Liberal party for a long period*. Apart from the obvious disastrous implications for the Liberals, this point also casts doubt on what remains of the case against Swan. If Grech was working for the Libs all along, he could easily have generated a large volume of emails, reports and so on, without any particular pressure from the government

* The term “mole” is commonly used in such cases, but the original idea of a mole was one of an agent in place who did nothing but burrow nto the target organisation, waiting for the time to act.

The Garnaut Review draft report has just come out. The site is clogged, but I’ve managed to get a copy of the report and press release (I’ve attached the latter here.

There’s a lot of discussion of the Murray Darling Basin where the worst-case projections are about as grim as they can possibly be. My UQ research group (Risk and Sustainable Management Group) did the economic modelling that translated the climatic projections into predicted changes in land and water use. There are big adverse impacts under most of the ‘business as usual’ scenarios. On the other hand, in the projections where CO2 concentrations are held to 450 ppm things aren’t bad, and even 550 ppm would still allow irrigation to continue.

More soon on the policy recommendations. Whether or not the government ultimately follows Garnaut’s proposed model, there’s no doubt that the Review has shifted the terms of debate substantially. Those (like the Federal Opposition) who are tempted to play the issue for short-term political gain will pay a big price in the end if they succumb to that temptation.

A point discussed on the blog recently is whether Limits to Growth actually predicted rapid exhaustion of critical natural resources, or whether this was a misrepresentation by much later critics. The text itself isn’t definitive, since it contains some projections showing rapid exhaustion and others (in which discoveries boost stocks by a factor of five) in which exhaustion takes place over a century or so, and also because the projections were revised in later editions. However, my memory is that both supporters and critics focused on the more extreme projections.

I have a couple of pieces of evidence to support this claim. First, I’ve put over the fold a piece by Matthew Simmons defending the Club of Rome and saying

Nowhere in the book was there any mention about running out of anything by 2000. Instead the book’s concern was entirely focused on what the world might look like 100 years later.

But Simmons’ case is undermined by the dust jacket at the beginning of his article which sells the book as ‘The headline-making report on the imminent global disaster facing humanity’. I think most readers buying a book that was sold like this would focus on the worst-case scenarios.

To support this interpretation, here’s a para from a 1979 book, Economics, environmental policy and the quality of life, by Baumol and Oates who begin their Chapter 7 with a reference to Limits to Growth

Certain recent studies have raised the spectre of complete exhaustion of some of the worlds critical resources. they tell us that in the absence of drastic countermeasures, within a matter of decades mankind is likely to run out of petroleum, natural gas and other vital fuels, to deplete virtually all the sources of various minerals such as mercury, copper and silver and to have cultivated essentially all remaining and still usable land. In brief, the world economy will be brought to the brink of catastrophe by hte exhaustion of natural resources.

Baumol and Oates also present in Chapter 9 a “Standard Run” from the World Model showing catastrophic collapse a little over halfway between 1900 and 2100, that is, right about now. Baumol and Oates, like most economists, are critical of Limits to Growth, but they aren’t rightwing anti-environmentalists by any stretch of the imagination. I think it’s fair to say that most readers at the time, whether they agreed with the Club of Rome or not, focused on predictions of imminent resource exhaustion, and not on what might happen in 2070

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Over the last few months, the volume of bad news from Iraq has diminished. For example, the number of US troops killed in November (about one per day) was the lowest in a couple of years. While it’s much harder to measure Iraqi casualties the number seems to be declining, at least in Baghdad. What does this mean for the policy choices facing the US and its allies?

The short answer is ‘Not much’

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There’s been quite a bit of discussion here and elsewhere about the cost of large (60 per cent or more) reductions in CO2 emissions. A lot of people are intuitively convinced that since everything we do uses energy, large reductions in energy use can only be achieved at the cost of large reductions in living standards. Economic analysis says the opposite. Typical estimates of the cost of such reductions are in the range 1-3 per cent of income for the world as a whole. Australia is more energy intensive, and ABARE (by no means biased low on this kind of thing) gives a range from 1.7 to 3.4 per cent for plausible scenarios. Only by rigging the game could ABARE get the high estimate of 10 per cent, quoted by Howard a while back. And even a 10 per cent reduction in income, by 2050, would not actually be noticeable against the background noise of macroeconomic and individual income fluctuations. On plausible projections, it would mean average income would increase by 110 per cent instead of 120 per cent.

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My draft review of Karen Cerulo

“Never Saw It Coming: Cultural Challenges to Envisioning the Worst” (Karen A. Cerulo)

is over the fold. Comments much appreciated
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My first post on the Stern review started with the observation that

the apocalyptic numbers that have dominated early reporting represent the worst-case outcomes for 2100 under business-as-usual policies.

Unfortunately, a lot of responses to the review have been characterized by a failure to understand this point correctly. On the one hand, quite a lot of the popular response has reflected an assumption that these worst-case outcomes are certain (at least in the absence of radical changes in lifestyles and the economy) and that they are going to happen Real Soon Now. On the other hand, quite a few critics of the Review have argued that, since these are low-probability worst cases, we should ignore them.*

But with nonlinear (more precisely strongly convex) damage functions, low-probability events can make a big difference to benefit-cost calculation. Suppose as an illustration that, under BAU there is a 5 per cent probability of outcomes with damage equal to 20 per cent of GDP or more, and that with stabilisation of CO2 emissions this probability falls to zero. Then this component of the probability distribution gives a lower bound for the benefits of stabilisation of at least 1 per cent of GDP (more when risk aversion is taken into account). That exceeds Stern’s cost estimates, without even looking at the other 95 per cent of the distribution.

An important implication is that any reasoning based on picking a most likely projection and ignoring uncertainty around that prediction is likely to be badly wrong, and to understate the likely costs of climate change. Since the distributions are intractable the best approach, adopted by the Stern review, is to take an average over a large number of randomly generated draws from the distribution (this is called the Monte Carlo approach).

To sum up, the suggestion that because bad outcomes are improbable, we should ignore them is wrong. If it were right, insurance companies would be out of business (not coincidentally, insurance companies were the first sector of big business to get behind Kyoto and other climate change initiatives)
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The Stern review report is big, and I haven’t had time to digest more than a little bit so far. One point to make is that the apocalyptic numbers that have dominated early reporting represent the worst-case outcomes for 2100 under business-as-usual policies. But even looking at the less dramatic cases, the same basic messages emerge.

• We can stabilise CO2 levels over the next fifty years at very low costs of around 1 per cent of GDP.
• The costs of doing nothing are large and unpredictable
• The costs of stabilisation will be greater the longer we delay
• Poor countries will be worst affected

More on all these points soon.

With the major issues in the scientific debate over climate change having been resolved, attention has now turned to the economics of stabilising the climate and to the costs of doing nothing. Following the House of Lords economic committee inquiry last year, which spent most of its time promoting denialist attacks on climate science, and had little of value to say on the economic issues, the UK government commissioned Sir Nicholas Stern, former chief economist of the World Bank to look at the issue properly.

His report is about to be issued in the UK today, and previews have given the major conclusion – it’s much more costly to do nothing than to do something. According to the reports, the estimated cost of stabilising CO2 emissions is 1 per cent of GDP by 2050. This is at the low end of the range of estimates I’ve obtained from back-of-the-envelope exercises.

The striking feature of the reported findings relates to the potential costs of doing nothing, from 5 per cent to 20 per cent of GDP. I assume the latter estimate is based on worst-case scenarios, which have relatively low probability but are nonetheless important in working out an expected cost of doing nothing.

The credibility of the report has been enhanced by the first critical responses noted in the press. One is from Exxon shill Steven Milloy, who repeats the discredited attacks on climate science he’s been pushing for years, with a few new variations. He even drags out cosmic rays. The Guardian mentions his affiliation with the Cato Institute, apparently unaware that they dumped him a year ago over his unethical behavior.

Even more interesting is the reference to “a group of nine rightwing economists”, including the former chancellor Nigel Lawson, who criticised Stern’s discussion papers in January. What’s not noted here is that it was Lawson who launched the House of Lords exercise, rigged the process to ensure that most of the witnesses were denialists and drafted the carefully ambiguous discussion of the scientific issues which, on the one hand, correctly disclaimed any relevant expertise on the part of the committee, and on the other hand, dishonestly promoted the denialist view that the debate is still wide open. Now that this exercise has turned out to be a massive own goal for Lawson and his allies, they are naturally upset.

More tomorrow (or maybe later today) when the report is released. In the meantime, responses to Stern’s earlier discussion paper, including mine, are here

Pessimism seems to be a newly popular theme in American cultural discourse. Having written a bit about worst-case scenarios, I was interested to get a review copy of Karen Cerulo’s Never Saw It Coming: Cultural Challenges to Envisioning the Worst. Perhaps because I’m naturally optimistic by temperament, I’m finding Cerulo’s relentless pessimism a bit annoying, and, not coincidentally, finding a lot to disagree with in the book.

One point particularly struck me. Cerulo claims that “positive asymmetry” is demonstrated by the fact that, in theology and art, Heaven is given a detailed and appealing description, while hell is described only in vague and non-specific terms. She mentions, as an illustration of the latter point, an etching inspired by Dante’s Inferno.

My recollection of Dante is that the descriptions of Hell, and the various categories of sinners, were detailed and intricate, making the Inferno a fascinating book, while Purgatory was less distinctly graded and the Paradiso was unreadably dull. I haven’t read Paradise Lost or Paradise Regained, but I get the impression that the same is true. Correct me if I’m wrong here, but I thought this was one of the standard criticisms of religious art – Hell and the Devil are made much more interesting than Heaven and Hell.

Cerulo focuses mainly on paintings, and maybe she’s right on this score, but even here I’d hazard a guess that the work of Hieronymus Bosch is much more widely reproduced than any detailed representation of Heaven.

I’ve been reading the latest ABARE report on climate change, kindly sent to me by my colleague Renuka Mahadevan . While there are some problems with the analysis and even more with the way it’s been reported, the central findings are strikingly consistent with estimates I’ve made about the costs of stabilsing global CO2 levels, most recently here

All the evidence, though, is that we can reduce emissions to levels consistent with stabilising global CO2 levels over the next few decades at a cost of around 5 per cent of GDP – a few years worth of economic growth at the most. Quite possibly, as in previous cases, this wll turn out to be an overestimate.

ABARE studies a number of scenarios in which global CO2 levels are stabilised at 575 parts per million in 2100 and reports the estimated reduction in global product at 2050, which ranges from 1.7 per cent to 4.3 per cent, or from a bit under 1 years per capita growth to a bit over 2 years. That is, in the worst-case scenario (which is somewhat problematic in modelling terms, I think), the living standards in 2150 will be those that would have been reached in 2048 under the base projection.

ABARE is not known for lowballing the estimated costs of mitigating climate change, but if you’re going to do a credible modelling exercise, it’s inevitable that numbers of this magnitude will emerge. This simply reflects the fact that carbon-based fuels make up only a modest proportion of the value of total output, and that the demand for carbon (or more precisely C02) emissions is bound to be at least moderately elastic in the long run.

When I suggested yesterday that Stephen Barton had reinvented the Brisbane Line with his claim that Kokoda didn’t matter I was making the standard argumentative move of drawing a logical inference from Barton’s position which, I assumed, he would indignantly reject. Far from it! As Mark Bahnisch observes in comments, Barton explicitly endorsed the Brisbane Line strategy when he was interviewed on Lateline, saying

What I was saying was that it was an important campaign, but it wasn’t the battle that saved Australia. Australia was engaged in a world war. What that means is that events far beyond our control and far beyond our borders are ultimately going to secure our future. Now let’s take the worst-case scenario, that say they did a diversionary raid or they occupied part of Queensland. Now ultimately did that mean that Australia would lose the war? Well, once the allies won in Europe and the full might of the allies came to bear on the Japanese, ultimately the Japanese would be defeated. So it would have been a terrible situation, it would have been grim and appalling, but it ultimately would have been a temporary situation. We have to remember that this was a world war and when we talk about the battle that saved Australia, we’re sort of putting these parochial blinkers on and seeing the centre of the war’s gravity in New Guinea. We’ve got to sort of step back from that and recognise that it was a world war. (emphasis added)

Given that Barton explicitly draws parallels with the present, it’s reasonable to ask whether he thinks the same reasoning is applicable today. If strategic decisions made in Washington or London require that Australia be left open to attack or invasion, should we be comforted by the thought that “Australia’s security has traditionally been won far beyond our borders, as a member of grand alliances. ”

Barton has previously been a Liberal party staffer, and the ideas he’s presenting are consistent with (an extreme interpretation of) the government’s defence strategy of reducing emphasis on the defence of Australia in favour of a capacity to send expeditionary forces to distant conflicts. So, is anyone from the Liberal side of politics going to step forward and speak in favour of defending Australia, either in 1942 or today?

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Before the Iraq war began, Yale economist William Nordhaus estimated the likely cost at between $100 billion and $2 trillion. At the time most of the interest lay in the fact that the bottom end of the range was twice as much as the $50 billion estimate being pushed by the Administration. But with a couple of years’ experience to go on, Nordhaus’ upper range is looking pretty accurate. Assuming that Bush ‘stays the course’, it’s safe to estimate that the war will cost the US at least $1 trillion by the time all the bills come in, and it could easily be closer to $2 trillion.
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Another in my series of worst case scenarios. A bit more locally oriented this time.
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The big threat to the worlds environment as a whole is global warming. The best-bet projections prepared by the International Panel on Climate Change suggest that, in the absence of substantial action to mitigate global warming, global temperatures would probably increase by about 1 degree C between now and 2050 and by a further 1 degree C between 2050 and 2100.
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For the next few years, the worst-case scenarios for the world and Australian economies involve a combination of rapidly rising interest rates and rapidly declining prices for assets, particularly in housing and construction. Such an increase in interest rates could begin in the United States, if investors (particularly Asian central banks) lost faith in the capacity of the US Government to bring its burgeoning deficits under control and in the capacity of the US Federal Reserve (that is, Alan Greenspan) to keep inflation rates low. A market-driven increase in US interest rates would rapidly spread to other countries with low savings rates and high current account deficits, notably including Australia.
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As a result of my Citation Laureate award and the associated write-up in the local paper, I’ve been asked to give some thought to worst-case scenarios for a range of issues, some global and some specific to Brisbane. What I’ve written so far is very rough, so I’d appreciate comments, useful links and so on. My first scenario deals with security and is, in a sense, optimistic. The plausible worst case scenario now isn’t nearly as bad as the one I grew up with – a thermonuclear war between Russia and the West
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I think Tim Dunlop already noted the new White House line from Ari Fleischer that Iraqi disarmament is equivalent to regime change. But now the NYT has it from Bush himself. So far, things have gone as I predicted after Bush’s first UN speech, and I’m feeling happier about the Iraq situation than I have done at any time since the “Axis of Evil” speech. The worst-case outcome, a unilateral US war with no clear aims, now seems much less likely. If Saddam disarms, Bush will have scored a major victory without compromising the war on terror. If he refuses, it should be possible to get unified world support for his overthrow. The dangerous case is where Saddam engages in foot-dragging just enough to justify an attack as far as the US is concerned, but not enough for others. This is his past form, but he may well realise that it’s his own neck on the line this time.
A peaceful resolution in Iraq will be a huge benefit to us in hunting down the Bali bombers. We need the full co-operation of the Indonesian government and civil society and this will be much easier to get if we are not engaged in what can be represented (in the terms of praise used by leading warbloggers) as ‘a new imperialism’ or ‘cultural genocide’.

Of course, from the viewpoint of unilateralist warbloggers, the reverse of the above analysis applies. If Saddam complies totally, they don’t get a war at all, and if he is totally defiant they get the ‘wrong’ war, one with UN authority and a multinational coalition that will run the postwar nationbuilding, if not the actual fighting. The optimal outcome from this viewpoint is the one where Saddam promises to comply, then drags his feet.

Following some vigorous exchanges, we seem, surprisingly enough, to have come close to a consensus about the range of scientific views on global warming. All contributors to the debate, notably including Ken Parish, seem to agree that my proposed statement of the Global Warming hypothesis:

GWH: Human activity has contributed to global warming over the past century, and, in the absence of policy responses, is likely to generate additional warming of at least 1 degree C over the next century

is broad enough to encompass the views of all the serious contributors to the climate science component of the debate, including moderate sceptics like Richard Lindzen. In particular, all serious contributors to the debate agree, at least on the balance of probabilities, that the evidence supports human-induced global warming.

So the big question for debate is how much warming the “business as usual” scenario will lead to. The range
(a) around 1 degree – the skeptical view
(b) 1 to 3.5 degrees – the mainstream IPCC view
(c) 3.5 -5 degrees – the worst-case view (e.g Stephen Schneider)
From what I can see, effects like substantial species extinction, destruction of natural ecosystems, flooding etc are likely to be severe if the warming exceeds 2 degrees, and warming of 5 degrees would produce widespread human catastrophe.
Which of these is right depends on complex arguments about feedbacks and so on, on which aren’t going to be resolved in a hurry. But the existence of uncertainty cuts both ways. Things might turn out better than the IPCC expects, but they could also be worse.
So the question is, what do we do in the face of this kind of uncertainty. There are both philosophical and practical issues here. Philosophically, there’s a choice between ‘precautionary’ and ‘permissive’ principles. The precautionary principle says we should minimise environmental risk in cases of uncertainty, the permissive principle says we shouldn’t restrict economic activity unless it’s been proven to be harmful.
I prefer a practical rather than a philosophical approach. Will it be cheaper, on average, to do nothing now and take really drastic action in a shorter timeframe if the warming turns out to be in the upper range of predictions, or to start now with Kyoto and take the risk that costs will have been incurred for nothing if the sceptics turn out to be right? Given the difficulty of doing anything fast that’s already been demonstrated, I think the latter approach is justified.