Monday, February 29, 2016

The Pitfalls in Pricing Carbon

The federal government's favoured vehicle for cutting greenhouse gas emissions is the introduction of a carbon price or a carbon tax on fossil energy.

These calculations are usually based on some notion of the social cost of greenhouse gas emissions to the atmosphere, currently the main driver of global warming (but natural feedback loops are catching up frighteningly fast). We use integrated assessment models, IAMs, to work out such things as economic risk and social costs of GHG emissions.

However Nicholas Stern, Baron Stern of Brentford to you, has written a paper suggesting current IAMs grossly understate the actual risks and costs and therefore mislead policy makers.

The Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), published in 2013 and 2014, provided a comprehensive overview of the literature on the costs of action and inaction. But the assessment understated the limitations of the research done so far. Essentially, it reported on a body of literature that had systematically and grossly underestimated the risks of unmanaged climate change. Furthermore, that literature had failed to capture the learning processes and economies of scale involved in radical structural and technical change, and the benefits of reducing fossil-fuel pollution, protecting biodiversity and forests, and so on.

The IPCC pointed out1 that estimates of losses resulting from a 2 °C increase in mean global temperature above pre-industrial levels ranged from 0.2% to 2% of global gross domestic product. It admitted that the global economic impacts are “difficult to estimate” and that attempts depend on a large number of “disputable” assumptions. Moreover, many estimates do not account for factors such as catastrophic changes and tipping points.

...Sadly, most IAMs struggle to incorporate the scale of the scientific risks, such as the thawing of permafrost, release of methane, and other potential tipping points. Furthermore, many of the largest potential impacts are omitted, such as widespread conflict as a result of large-scale human migration to escape the worst-affected areas.

...IAMs are also used to calculate the social cost of carbon (SCC). They attempt to model the incremental change in, or damage to, global economic output resulting from 1 tonne of anthropogenic carbon dioxide emissions or equivalent. These SCC estimates are used by policymakers in cost–benefit analyses of climate-change-mitigation policies.

Because the IAMs omit so many of the big risks, SCC estimates are often way too low. As a first step, the consequences being assessed should include the damages to human well-being and loss of life beyond simply reduced economic output. And the very large uncertainty, usually involving downward bias, in SCC estimates should always be made explicit.

As the IPCC acknowledged, published SCC estimates “lie between a few dollars and several hundreds of dollars”. These values often depend crucially on the 'discounting' used to translate future costs to current dollars. The high discount rates that predominate essentially assume that benefits to people in the future are much less important than benefits today.

...Most current models of climate-change impacts make two flawed assumptions: that people will be much wealthier in the future and that lives in the future are less important than lives now.

The former assumption ignores the great risks of severe damage and disruption to livelihoods from climate change. The latter assumption is 'discrimination by date of birth'. It is a value judgement that is rarely scrutinized, difficult to defend and in conflict with most moral codes.

Stern goes on to note that we also understate the benefits that society can realize from alternative energy technologies, usually because we have trouble visualizing the knock-on effects of scientific and technological breakthroughs.

Why does this matter? Easy. Our government wants to introduce a carbon price but it has to be a realistic carbon price, one that weighs all the factors from the downsides of continued fossil fuel use to the upside advantages of transitioning to alternative clean energy. Without that comprehensive approach we stand a very good chance of falling back on a token price that bears little resemblance to the cost/benefit equation and is more in line with a political number.


Toby said...

The robbing Peter to pay Paul method that politicians seem to favour could be simplified. Let them start with removing all the subsidies to carbon, direct and indirect, including tax breaks. Let's make carbon pay its own way.

One of the biggest problem in governing has to be that we have all learned to see everything in big business measurements. We all genuflect to the GDP which suits big business and its neo-liberal true believers but does not factor in the rest of our activities. A hurricane rips through causing great devastation and the GDP goes up because of the money made rebuilding. For the people affected the hurricane represents a big loss and it should be reflected in our economic measurements. There are better measuring systems available and governments should use something better.

"Genuine Progress Indicator

We believe that if policymakers measure what really matters to people—health care, safety, a clean environment, and other indicators of well-being—economic policy would naturally shift towards sustainability.

Redefining Progress created the Genuine Progress Indicator (GPI) in 1995 as an alternative to the gross domestic product (GDP). The GPI enables policymakers at the national, state, regional, or local level to measure how well their citizens are doing both economically and socially."

Hugh said...

In BC we a carbon offset program, where the public sector (schools, hospitals, universities etc) is forced to purchase carbon offsets from private companies.

These companies undertake emission-reduction projects, for which they say they need this public money for funding. Yeah, right.

The school boards, hospitals etc, and then the BC government, can then claim they are 'carbon-neutral'.

At the same time, GHG emissions in BC are not going down. The whole thing is a fraudulent, useless, infuriating scam.

The Mound of Sound said...

I agree, Toby. John Ralston Saul in "The End of Globalism" relates how other cultures don't accept the GDP yardstick and instead use other factors such as quality of life and even happiness. GDP is a tool of corporatism and is part of the process that leads to illiberal democracy and inequality. In addition, it's nothing less that a slavish dedication to perpetual exponential growth that can only be maintained by denying the very finite nature of life on a single planet.

The Mound of Sound said...

One of the big problems we have, Hugh, is that our forests have recently transformed from a carbon sink into a carbon bomb. There are ways to reverse that but there are no signs they're even on Christy Clark's radar.