I was contemplating writing a post about a discussion I had on Twitter regarding whether or not we should focus on adaptation while developing technology, but I don’t really have the time now. The one comment I will make is that technology development is of course a crucial part of future progress. However, if we do have some desire to replace fossil fuels with some alternative, then that would seem extremely difficult (almost impossible, one might say) if we choose not to incentivise a change to alternatives, and if the cost of using fossils fuels doesn’t reflect the true cost of their use.
What I wanted to post (as a reminder to some, maybe) is that cumulative emissions matter. As you can see in the figure below (from the IPCC’s AR5 SPM) how much we will warm largely depends on the total amount of CO2 we emit (not quite, but reasonably close). Although there isn’t really some well-defined threshold above which it will be catastrophic and below which it will be fine, the figure below does illustrate that if we do want to avoid a certain amount of future warming, we have to constrain our total future emissions. Therefore, the more we emit today, the faster we will have to reduce our emissions in the future.
I am not really trying to draw any actual conclusions from this, other than to point out that our cumulative emissions do matter when it comes to how much warming we will experience. I will, however, also add the following figure that Mark Maslin has been promoting on Twitter. It shows that, currently, we are following what many would regard as a high emission pathway. So, total emissions matter and we’re currently emitting CO2 at about the fastest rate we’ve considered realistic. Some might think that this would suggest that we should be putting some serious effort into finding ways to reduce our emissions so as to avoid our cumulative emissions rising to the point where significant warming becomes unavoidable. Others, it would seem, disagree.
“if the cost of using fossils fuels doesn’t reflect the true cost of their use.”
Ah, the “no true cost” fallacy 🙂
I recognize the intention but as I have had to guess many times at the “cost” of various computer security failures I suspect there’s rather a lot of guesswork assigning “true cost” to fuel.
Maybe those who do economic modelling would disagree about it being guesswork, but it’s certainly not an exact science. We are, however, confident that there is a future cost to emitting CO2 today. Not reflecting that in the cost of using fossil fuels today therefore makes it even harder for alternatives to compete in an un-incentivised market.
Here’s the paper I’m familiar with concerning the true cost of coal:
Paul R. Epstein et al. 2011. Full cost accounting for the life cycle of coal.
Click to access epstein_full%20cost%20of%20coal.pdf
From the abstract, keeping with the theme here
“Many of these so-called externalities are, moreover, cumulative. Accounting for the damages conservatively doubles to triples the price of electricity from coal per kWh generated, making wind, solar, and other forms of nonfossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive.”
Costs from climate change aren’t even the majority of the external costs involved, although probably the hardest to predict.
==> “Ah, the “no true cost” fallacy”
Ah, the “If we can’t measure something precisely with 100% accuracy, we shouldn’t bother trying to estimate it and just ignore its existence so as to maintain the status quo” fallacy.
The corresponding Figure TS_TFE8_1 from the Technical summary contains some interesting additional information.
It’s still better to read also the caption and perhaps more from the Tecnical Summary (page no 104).
As far as I can tell, this : [http://pubs.iied.org/pdfs/11501IIED.pdf] is the best available evidence on adaptation costs of AGW.
Joe Romm reported on this in 2009, then reposted here: http://thinkprogress.org/climate/2013/03/10/1696521/flashback-scientists-find-1240-trillion-in-climate-impacts-on-current-co2-path-so-we-must-mitigate-to-under-450-ppm/
The money quote:
“The study finds that the mean “Net present value of climate change impacts” in the A2 scenario is $1240 TRILLION with no adaptation, but “only” $890 trillion with adaptation.”
An alternative report is the assessment of the social cost of carbon of US EPA. For background see this EPA site.
From the report itself we can see how wide the range of estimates is. We really lack agreement on the correct value.
It’s the discount that we can’t really agree on though, isn’t it?
==> ” Not reflecting that in the cost of using fossil fuels today therefore makes it even harder for alternatives to compete in an un-incentivised market.”
I have not seen a way to engage with “skeptics” on this issue. Here is how I’ve seen the discussions go.
1. A “skeptic” says that subsidizing alternative pathways for energy supply are too expensive.
2. I say that their conclusion is necessarily based on an assumption that current prices for fossil fuels accurately reflect the ratio of costs vs. benefits of externalities (not to mention the costs vs. benefits relative to other energy supply sources going forward into the future – notably including the cost of the impact of ACO2 on the climate).
3) They say that the ratio of costs versus benefits of externalities cannot accurately be measured.
4) I repeat that their conclusion about the relative price of various energy supply pathways assumes a net neutral (or positive) cost vs. benefits ratio of externalities from the status quo. For example, nowhere in their economic assessment do they account for the cost of health impacts of particulate emissions, or the geo-political costs of enriching governments that systematically deny large %’s of their citizens what they would need to manifest their social capital.
5) They say that the ratio of costs versus benefits of externalities cannot accurately be measured.
6) I say that decision making in the face of uncertainty requires making decisions in the face of uncertainties.
7) They say that the ratio of costs versus benefits of externalities cannot accurately be measured.
Maybe someone can help me out here? Maybe Pekka? It seems to me that we have two internally logically consistent arguments, but those two arguments are mutually incompatible, logically.
It is true that there is always a standard of accuracy that the measurement of externalities cannot meet. If we have no way of establishing some kind of exclusion criterion, the costs of externalities could always just be dismissed (how can we include them if we can’t measure them accurately?)
It is also true that a determination that alternative pathways for energy supply are “more expensive” than fossil fuels necessarily assumes that the external cost vs. benefits ratio of fossil fuels is neutral (or positive).
“… I suspect there’s rather a lot of guesswork assigning “true cost” to fuel.”
I suspect you are right.
However similar uncertainty did not prevent global resource regulation of CFCs, Lead, Asbestos, DDT, etc when the guesswork all went in one direction. Damage from continued uncontrolled use.
Other resource exploitations have also been limited by regulation, although Whales, Wood and Slaves perhaps owe more to effective alternatives. (Oil, Coal and Steam)
Given the central role that fossil fuels play in the present global economy however I suspect it will require an alternative source with equal or better price and convenience.
Efficient storage of electrical energy would be the game-changer.
Did this in response to a claim a few years back at another place that wind-turbines would NEVER be a viable alternative.
Its a bit rough and never got finished, the joke wore thin before I put that much work in…
Not only. All the estimates could as well be called guesstimates. It’s really impossible to tell within a factor of two, perhaps within a factor of five or ten, what the costs are before discounting.
Okay, thanks. So we really don’t know. Presumably, what we do know is that it’s going to get bigger the longer we wait to implement something?
Joshua, it is the I won’t accept models, I want data from the future argument. If we had data from the future, we would use it
If we agree that the appropriate discount rate is relatively high (more than 3 percentage points higher than the growth rate) then near term costs dominate, and the estimates are more accurate, but few agree on that. If the discount rate is less than the growth rate, then calculations tend to diverge telling nothing.
Most would choose something between these extremes. In that case costs that will materialize far in the future are likely to dominate the outcome, and it’s exactly these costs that we cannot really estimate. In addition even small changes in the discount rate may then have a huge influence.
Here’s a question for you. The carbon tax is meant to reflect the future cost of emitting CO2. Assuming that we don’t reduce our emissions, then – as I understand it – the cost rises. Therefore, surely in any sensible scenario a carbon tax would be continuously evolving. So, if it starts too low, it will have to rise as our emissions rise. As it rises, we would then expect it to start having an effect and either levelling off or reducing, depending on how much of an effect it has. Therefore, it’s not clear to me that we need precision. Surely, what we need is to implement it and then allow it to evolve depending on how our emissions evolve?
Most coins have two sides (there might be a moebius coin http://en.wikipedia.org/wiki/M%C3%B6bius_strip) so I was contemplating what hidden benefit might exist for widespread use of carbon-based fuels; that is to say, benefits that accrue to society independent of the actual consumer (for whom the benefit need not here be explained).
I have a sense that it must exist as surely as hidden costs to society exists.
Using the boundaries of societies helps explore. The cost to, say, the Congo is a threat of rising sea level and likely to be even less pleasant a climate as now exists there. But is there any benefit? I propose there must be but not nearly as much attention is given to it. So let’s look at Google Earth. Well for a start there would be no Google Earth without the industrial revolution so that’s a start.
Congo enjoys modest fringe benefits of the industrial revolution. There’s a huge hydropower facility at Inga Falls. It produces clean electricity but its construction required rather a lot of petroleum. If you want to see something really weird, take a look at Djambala (S 2 32.9′ E 14 44.954′) — a half mile of 6 lane highway with a traffic circle at one end and the end of the plateau at the other end. Anyway, roads, pipes, wires are coming to Congo along with medicine, transportation, possibly some improvements in clean water.
Is there any place on Earth that has only cost and no benefit? I propose Borneo for this category — the natives generally enjoy no modern conveniences but will still be exposed to any negative externalities.
Conversely, is there any place on Earth that has only benefit and no cost associated with global warming? Siberia comes to mind and in fact a whole strip around the Earth around 60 degrees north latitude will probably start enjoying something resembling a growing season.
So long as people try to be thorough in their estimates and analyses, I can respect their conclusions; but when people look at only one side of the coin, the best part might actually be on the flip side.
I believe that these calculations do take into account that we will benefit by burning fossil fuels. The cost is meant to reflect the cost associated with generating that energy using fossil fuels, rather than via some alternative.
Power plant costs for renewables have come down considerably;
At this point it makes more sense to top up our energy mix with renewables.
Michael 2: You don’t know what you’re talking about. We don’t have soil up here in the north. We just don’t. Making it warmer and drier won’t exactly help. Yields on crops are currently oh 20% of what its like with good soil in, say, California. Yet Global Warming induced drought in California, is already driving up food prices.
I suppose if Americans want to starve and give away money to other countries, you could argue that as a benefit Michael 2. I’m sure the Russians would back you. Why don’t you make that argument on all the forums! 🙂
Making policy decisions cannot be stopped only because the knowledge is highly uncertain. The optimal policy decisions are not the same, but they may be equally important and strong in some way.
Having good knowledge about the future alternatives would certainly help hugely. If the economics were understood well even the differences between ideologies like libertarian thinking and the left would be reduced, because a major factor in the differences of opinion are related to opposing views on the relative capability of free markets and government in finding good solutions. Alas, we don’t have that good knowledge, but decisions are made anyway to the worst or to not quite so bad (I’m not optimist on the success in making good decisions).
What may actually be helpful in choosing, what to do first is that the whole range of potential action is not politically possible. The second essential point is that the first decisions are only first decisions. Later decisions can be done having at least some more information.
The approach of starting with a moderate carbon tax applied in a harmonized way widely in all most important countries were probably the best alternative as first decision, if it were politically possible. Unfortunately the case seems to be that “tax” is a dirty word that leads to failure in international connections. It’s a tabu even in Brussels. People have proposed introduction of a carbon tax in disguise, i.e cap and trade with limits on the price, but even that seems to be too difficult. The present cap and trade has failed pretty badly for many reasons, and is likely to fail in new ways in the future. Thus I still hope for a carbon tax, but I’m not optimistic on that.
7) They say that the ratio of costs versus benefits of externalities cannot accurately be measured.”
Skeptics, they know the price of everything and the (future) value of nothing.
(h/t Oscar Wilde.)
We can idly speculate. Or we can absorb what many people have studied for many years. The net benefits of global warming are negative. The costs of mitigation are affordable.
it is the airborne CO2 concentration that changes radiance, which is increasing at about half the rate of emissions:
Does that mean that cutting emissions by half would result in static concentrations?
No. The airborne fraction is the fraction that remains in the atmosphere. It is around 50%. Therefore if we cut emissions by half, then the atmospheric concentration would rise about half as fast.
I’m not optimistic either. What I was trying to get at is that the difference between a carbon tax that would have little effect and one that could have a substantial effect would seem to be reasonably small. For example, $10 per tonne would probably do little, while $100 per tonne would increase the cost per MWh for fossil fuels to above that for many alternatives. Therefore, if we had the will to do something we wouldn’t need to know precisely the carbon tax, we’d simply need to start somewhere and be willing to adjust it with time. Of course, I don’t think we actually have the will to do so.
Lucifer and ATTP,
My understanding is that cutting suddenly the emissions to one half would almost stop the growth in atmospheric concentration for a few years, but over longer term the CO2 in atmosphere would start to increase again with a rate that gradually approaches roughly half of the reduced emissions. Even then the factor would be somewhat lower than with larger releases.
If the emissions were cut to one half, that would affect very rapidly the transfer of CO2 to the topmost ocean, which interacts strongly with the atmosphere. Other reservoirs are further behind. Thus the concentration difference that drives transfer to them would not be affected as rapidly by the change in emissions to the atmosphere. The amount of carbon in surface ocean is given as 900 PgC in the IPCC AR5 figure, which is more than the atmospheric carbon, but due tot the Revelle factor it does not take even nearly as much additional carbon in equilibrium as the atmosphere.
Thanks. I presume that would occur if the change were sudden, rather than if we gradually reduced our emissions by half? I imagine that if we suddenly cut our emissions in half, that would either indicate that something severe had just happened or was about to happen 🙂
An additional point is that some amount of emissions is needed to maintain the present atmospheric concentration even in the long run. How large fraction of the present emissions that would be, I cannot tell. That fraction would also decrease very slowly over longer periods up to thousands of years as various reservoirs approach their equilibrium with the atmospheric concentration..
Steve Easterbrook has a post that indicates that if we stopped emissions totally, the CO2 concentration would drop so as to keep temperatures fixed. Although the drop isn’t linear, it falls by about 40ppm over 300 years. Given that 1ppm increase is associated with about 15GtCO2, that would suggest that something like 2GtCO2 per year would keep atmospheric concentrations fixed. So, about 20 times less than out current emissions.
And that, if I understand this correctly, leaves us in a ~400ppm world where Arctic summer sea ice is disappearing and the WAIS may possibly already be fundamentally destabilised. Then Steve Bloom will pop out of the ether and remind us that the mid-Pliocene warmth may be indicative of the fully equilibriated Earth System response to ~400ppm CO2.
Not hugely encouraging, really.
Looking at Pekka’s 3D model, I wonder what a game of ClimateCraft would look like.
the biosphere appears to be locking up about 5 Gt per year,
an increase of almost 4Gt per year since 1960.
Your estimates seem very low. In the old Bern model of Maier-Reimer & Hasselmann the share of input that’s removed with time constant of 362 years is 20% and that of 74 years is 32%. In addition 25% is removed with time constant of 17 years and 10% very rapidly (13% remains for ever in the model). Both the slower removal processes must be compensated by the additional emissions for long meaning that roughly half of the present emissions would be needed for a few decades and some 20% for a couple of centuries.
The newer estimates give smaller numbers, but I don’t have that information quite as readily accessible.
Interesting that mitigation sceptics would argue that the price of carbon is not only highly uncertain, but that it is impossible to compute. Typically mitigations sceptics are proponents of the free market hypothesis that claims that market prices ensure that goods are allocated optimally. If it is impossible to determine the price of carbon emissions, their hypothesis would not be valid for a reasonably important sector of the economy.
Seems like they would need to argue that it is impossible that climate change has negative consequences to be able to uphold their pet hypothesis. Or they would put a lot of effort into trying to determine an objective way to compute a price for carbon to save their hypothesis.
If markets cannot determine the right price for fossil fuels that opens to door to determining the price of emissions democratically. Or am I missing something?
Willard, it would look like ElectroCity:
A simple game that, IIRC, takes about an hour to play. (I haven’t played it for a few years.) Nice to look at, fairly challenging, and entertaining enough that I was always pissed off when the time limit ran out. I vaguely remember thinking that it was a bit biased (against nuclear?) but that didn’t stop me playing it a couple of dozen times.
Could well be wrong. I was just doing a linear eyeball from Steve Easterbrook’s graph. It clearly also isn’t linear. Your numbers seem rather high, but I’ll need to think about this.
I found the new Impulse Response Function from Joos et al, (Atmos. Chem. Phys., 13, 2793–2825, 2013 http://www.atmos-chem-phys.net/13/2793/2013/doi:10.5194/acp-13-2793-2013) which is the main source for AR5.
The formula is
IRF = 0.2173 + 0.2240 exp(-t/394.4) + 0.2840 exp(-t/36.54) + 0.2763 exp(-t/4.304)
This should apply well enough for the present concentration. The calculation should take into account the history that has resulted to the present level.
Actually, Steve Easterbrook’s post seem to have it. The bottom left figure shows the CO2 emissions dropping from 10 GtC/yr to about 1 GtC/yr over the first 100 years, and then levelling off at about 0.5 GtC/yr. Multiply by 3.7 to get GtCO2/yr, so mine was too high.
A critique of ElectroCity that rings a few bells:
I had forgotten that it was funded by an energy company, and remember now that you’re best off using wind power only for a few turns at the beginning. After that it’s a waste of space. Rooftop solar can help but solar farms are a pointless luxury. Hydro is a big help but you can only have two of each type of power plant (a big annoyance).
Greenwashing? Probably. But it’s good fun and it makes you think a bit about trade-offs. Give it a go.
I notice that I forgot to say in any of my earlier comments that I like the idea of using TCRE as the most significant indicator that links emissions to warming. The post of Easterbrook that you linked explains, why it is so good better than the IPCC graphics alone.
The basic nature of the curve that Easterbrook shows is as expected. The emission needed to maintain the constant concentration falls somewhat more rapidly than I expected. Joos et al shows, how large the uncertainties in the carbon removal are. Their results are reproduced in this figure from AR5
The formula I gave leads (if I have understood correctly) to the blue line shown in the middle of the bands. Thus the reality may differ quite a lot of that in either direction.
Once upon a time, there was Budget Hero:
Willard, re Budget Hero ‘retired’ sounds like a euphemism for ‘rumbled’ to those of us with suspicious minds.
The game I was thinking of that’s nice to look at is Clim City, not ElectroCity:
Now renamed ClimWay, it seems. I never played it much because I couldn’t get it to work offline. Also IIRC the gameplay was too fussy and preachy. But it sure did look perty.
There’s an even preachier one that’s all about European floodplains being swamped by CO2-driven tsunamis, or summat.
> to those of us with suspicious minds.
For all the other fine young cannibals out there:
Pekka, Joos et al study the reduction of CO2 after a one time, instantaneous pulse of 100 Gt Carbon. Because humans have been gradually ramping up emissions, rather than emitting as one time pulse, much of the previously emitted CO2 has already been absorbed into the ocean, and some has already been absorbed into the deep ocean, or sequestered by chemical weathering. Therefore applying the Joos formula will over estimate annual reductions of CO2 if applied to cumulative emissions. The formula coefficients are also derived for a 100 Gt pulse at a base 389 ppmv. The reduction will become less and less efficient with larger emissions, ie, the longer we delay the radical reduction in CO2 emissions.
Further, I will note that aiming for a leveling of of CO2 concentration is equivalent to aiming for the Equilibrium Climate Response. If we instead aim for (and achieve) zero net emissions, temperatures will tend to plateau at the TCR – a much better scenario.
To return to the discount rate, because damage is separated in time and place, with the future and the poor getting the worst of it, simple discount rates are unethical. Stern and others have argued for a social cost of carbon which equally weights benefits and costs to all people. See Stephen Gardiner for an argument about why no discount rate is appropriate for climate change issues
Eli, that part of the discount rate that discounts for economic growth (about 2% per annum) represents the net return of an alternate investment. Notionally if we took the amount to be invested on mitigation and invested it, our capital would grow at that rate. If the damage avoided by mitigation is less than that investment, after the 2.2% discount, then we would benefit future generations more by simply investing in economic growth. (Sorry, I have said that poorly, but you should get the idea.)
ATTP says: “However, if we do have some desire to replace fossil fuels with some alternative, then that would seem extremely difficult (almost impossible, one might say) if we choose not to incentivise a change to alternatives, and if the cost of using fossils fuels doesn’t reflect the true cost of their use.”
I have two problems with this: firstly, there is already abundant incentive to develop alternatives to fossil fuels. Billions of dollars are being spent on this subject, many people are researching renewables, not to mention nuclear fission and fusion. There is an abundance of incentives to support this. Why do we need to make fossil fuels more expensive?
The ‘true’ cost of fossil fuels sounds like a nice idea but is utterly meaningless in practice because no one has any idea what it is. You won’t find two economists who give you the same value. The negative externalities depend on all sorts of assumptions about the rate of technological progress and the societal impact of warming temps. There are also positive externalities to fossil fuel use -the fact that my doctor can get on a plane to see my father, who lives away from a main city, is a good thing for me as well as my father. And is also a good thing for the charity he works for. It would not be possible without a cheap source of airplane fuel.
It seems that your problem with what I said isn’t really a problem with what I said. All I’m pointing out is that there is a future cost to emitting CO2. We may not know precisely what it is, but it still exists. Hence, if we don’t find a way to reflect this in the cost of fossil fuels today, alternatives will need to be incredibly efficient if they are to compete in a marketplace where the cost of using fossil fuels does not reflect the true cost of its use.
But they almost all agree it’s non-zero and positive.
I’ll grant you that flying will almost always require fossil fuels. However, the positive externality in general is not because you used fossil fuels, but because you had a source of energy. A nuclear power plant will produce the same positive externality as a coal-fired power plant.
It is not obvious that the total cost of fossil fuels is positive.
Well, can you find a single reliable analysis that suggests that the social cost of carbon (or a potential carbon tax) should not be positive?
Eli and Tom,
We had on this site a couple of months ago a much more extensive discussion on discount rates, where the point that Eli mentions was also discussed. The problem is that discounting is essentially important in some respect, but the problems of inequality at a single time and intergenerational equality lead to strong contradictions in the use of discounting. For some purposes the discount rate must be fixed, in some respect it cannot be fixed. This issue seems to still be unresolved – and it may be difficult to find places, where it is even clearly stated.
The problem is more fundamental than just a technical issue that could be resolved with a better formula. The scientific papers that revealed gradually the problem typically add in their conclusions that mathematical analysis leads to certain conclusions, but that it’s unknown, how those conclusions should be interpreted in practice or something like that.
We have a similar problem very acute in discussion of mitigation. I have favored carbon taxes as the best solution, but I have not mentioned often one of its problems (perhaps the only really serious problem in addition of the difficulty of getting it adopted). That problem relates to the influence of a harmonized tax on poor people in a world, where purchase power parity differs very strongly from parity based on currency exchange rates and perhaps more importantly PPP varies greatly inside countries of great internal inequality. We could say that a carbon tax may lead to the situation, where the rich buy the food out of the poor’s mouth.
I know very well that the formula I presented is an impulse response. If you read carefully my earlier comments you find several sentences that wouldn’t make sense without that. For the old Bern model three different sets of coefficient were published for different sizes of the pulse. In the IPCC graphics I linked three pulse sizes are seen in the rightmost panel (long time periods).
The multiexponential model works well enough for a while, when it’s used as convolution kernel. The decline in the emissions needed to maintain constant concentration is at first based on partial dying out of the contribution of the earlier high emissions according to the steeper exponentials. In very long run the whole formula is not good enough. An appropriate multicompartment model would be better and capable of handling all amounts of cumulative emissions with a single formula. I don’t know, whether the results shown by Easterbrook take this into account.
Perhaps, but I think the problem lies more in how the “free markets cure all” crowd thinks about it, which you’ve captured here: Typically mitigations sceptics are proponents of the free market hypothesis that claims that market prices ensure that goods are allocated optimally.
I think the answer lies in why free markets tend to do better at allocation than centrally planned economies. Vendors use free markets to optimize shareholder value and maximise profits, specifically the more certain immediate ones. They’re at least as in the dark about true external costs and how to discount future cash flows as anyone, so the next annual report tends to dominate.
One ironic possible exception to this is the fossil fuel industry itself. I think they’re looking ahead 30-50 years or so, and like what they see.
Regulated free markets. Real free markets tend to steal the commons and screw the customers.
Eli – But I am (un)reliably informed that the only possible choice is between an unregulated libertarian paradise where the market is allowed to run free and wild to make everyone rich and happy on one hand, and North Korea When Kim Is In A Bad Mood on the other. The only solution would appear to be the death penalty for those who engage in hyperbole, promote extreme solutions or use logical fallacies.
==> “It is not obvious that the total cost of fossil fuels is positive.”
Do you think that renewables are not, as of yet, in general, cost-competitive with fossil fuels (and thus should not be sustained through “artificial” subsidization by government interference in the market)?
Victor Venema writes: (December 15, 2014 at 8:37 pm) “If markets cannot determine the right price for fossil fuels that opens to door to determining the price of emissions democratically. Or am I missing something?”
Yes. The “market” really has only one goal — to find the equilibrium between supply and demand and the “price” is inescapably that amount of revenue that exactly pays for the costs of production. Once a market is in equilibrium, there is no profit for anyone — just revenue, and just barely adequate.
The price chooses you; you do not choose the price.
Future costs exist but “the market” doesn’t care about that for the simple reason future costs to not affect current supply and demand equilibrium.
Markets exist in a universe of many markets; artificially raising the price of a commodity will reduce consumption of that commodity, increasing consumption of other commodities thereby increasing demand, and price, of the alternatives. Nations act like persons in this context; if Australia increases the price of its carbon, consumer nations will simply shop elsewhere.
Future costs often introduce personal bias and philosophy; the cost of becoming what you think the future ought to be. The most extreme example would be “unmining” iron after it has been used, put it back down in the ground in Minnesota — where a future generation can dig it up and start the cycle all over. But who says carbon, or iron, must be sequestered? That is where your personal wishes enter into “cost”.
I agree with caveats. The market will only tolerate so much regulation, less so post Citizens United as the foxes increasingly watch the hen house. At present, the big money perception obviously is that various mitigation packages contain too many sticks and not enough carrots. Maybe that’s true, maybe not — I do know there are never enough carrots and always a tendency for everybunny to gobble more than their share of not enough if they can swing it.
Still and all, I do know the sticks haven’t been working, more carrots might be good. Having already dropped the f-bomb on your blog yesterday and seen it dominate the discussion more than intended I’m loath to do a repeat. But I still sit here wondering whether it’s better to continue the partisan gridlock until we’re ankle deep in saltwater or bite the bullet and pay someone off with incentives in a big way that might leave a bitter finish on some palettes but would get things unglued in a semi-right direction:
Ease up on fracking — natural gas for coal seems a decent enough trade. Let Keystone go through but earmark the tax revenue for renewables development. Use some of the political capital gained to end the domestic ethanol subsidies/quotas and dial back on Brazilian import tariffs to make up some of the difference. The corn lobby is going to want something for that, someone above my paygrade not averse to this kind of horse trading can probably think of something. Etc.
The devil is in the details. The amount of regulation is not as important as the quality.
Joshua asked (from austrartsua) whether renewables should be subsidized. Here again most might agree on some form and level of subsidies, but may still say that they oppose any thinking that the subsidies are unlikely to be of the kind they might accept.
Discussion generalities leads each of us to think about different realizations of the general idea and thus to speak past each other.
What we are doing is comparing the costs of fossil fuels versus the alternatives. All energy sources have the essentially same benefits. But you can’t argue that the external costs of fossil fuels is in anyway comparable to most of the viable alternatives.
Forward contracts damn well do and shorts do the other way.
It’s been apparent for some time that M2 is not in good command of his material.
Forward contracts or derivatives are not needed as a (market) rational owner of an oil well or other exhaustible resource tries to get the maximal possible price of his valuable resource. That involves trying to guess future prices and leads therefor to variable prices. (This is not the only reason for price variability.)
Sometimes it’s difficult to figure out, how the owners of the resources apply Hotelling’s theory. That may be due to the importance of other considerations like international politics.
Michael 2, you described very well why markets are so powerful and why it is generally wise to use them to allocate goods. Decentralised there is much more information the wishes of the consumers and on the most efficient way to full fill them.
However, there is also the claim the markets ensure the most efficient allocation of goods. This is only true if you take the future into account, as others have also mentioned above. You can easily see that in increases in the price of oil when there is a new conflict in an important producing region. Well before the time that such a conflict has any influence on the production of oil, the prices go up. Even if the conflict in the end does not influence the production at all. If you want to fully ignore the future, like you seem to want to do, you will not allocate goods efficiently.
Another necessary condition for markets being efficient is well defined property rights. You cannot dump your waste in your neighbours garden. Even if that lowers your production costs and consumers benefit from the low prices. In the same way you cannot dump your CO2 problem onto other people (now and in the future). We need a government to guarantee property rights for markets to be efficient.
You can naturally ignore that and only use markets to hurt the poor and enrich the rich. That is something a social Darwinist would see as the natural way humans live and should live. But that violates the efficient market hypothesis and quickly results in medieval circumstances. When The Netherlands was world power, piracy was part of normal business doing and the monopolies of the Dutch companies were enforced by the naval power of the Dutch fleet. That is good for the profits of the Dutch, but it is not efficient seen globally.
Brandon Gates, in my view Germany is so active in promoting renewable energy both because of the sticks and the carrots. Sure Germans do not like to burden the world with the consequences of climate change. But an important motivation is also to be at the top when it comes to producing wind mills, the machines to make solar cells and to produce other good in an energy efficient way, to develop the solutions for a smart grid and an energy system in which energy demand responds to supply via its fluctuating price. And so on. Germany sees it as an opportunity to strengthen its industrial base and develop the high-tech for the future.
Another carrot, which I am not sure many Germans realise, is that in this way Germany makes the transition to a renewable economy in a more gradual way. This is much more efficient. Other countries may have to do this so quick that many investments in capital goods will go wasted. Fossil fuel power plants may have to be closed before their economic life time (either to reduce greenhouse gasses or because they can simply not compete any more). Australia and oil producing countries may have large problem restructuring its economy that depends so much on exports of fossil fuels. It would be smart to reduce your dependence on outdated technologies well in time.
Yes, I’ve never understood why this isn’t an obvious strategy.
Its interesting to see some solutions to many problems associated with Green Tech… like, what kind of power plug do you need for an offshore wind farm?
The ideas behind the German policies are clear, but there certainly isn’t general agreement on the success of the actual case. In particular it can be asked whether the costs have been reasonable in comparison with the results. Germany has contributes much to the development of solar sells, but a major part of the development is based on general advance in semiconductor technology. Other countries that have spent much less have also got good results.
My subjective assessment is that what Germany has done has been extremely wasteful and bad use of human resources. Many Germans seem to agree while many others are of the opposite opinion.
Absolutely. And of course, should the claims that there are insufficient fossil fuels to meet the worst scenarios, it also protects Germany against the ensuing resource crunch.
Regardless of how optimal or otherwise the German approach has been, what is unarguable is that it has not been disastrous for their economy.
Germany continues to have a very high GDP per head, and the German economy proceed far more resilient to the crash than most major EU economies.
German economy has been strong. It has managed to survive also large loans to Greece. The extra annual cost of the inefficient power generation has risen only in recent years to something like 20 billion euros. The German GDP has developed well, but the income of Germans not nearly as well.
anoilman: Cool indeed. I had wondered what those things would look like – and even if they were possible. And there they are.
If you do something new, you can always say in retrospect that you could have done so more efficiently. Half of the work I do is wasted in retrospect. If that were not the case, I would not be doing science, but something boring. That is the normal price of being at the top.
Certainly, but the way Germany has proceeded was considered highly questionable by many also before the fact, and for reasons that I believe to have been correct.
One thing is true, and that might be considered enough to justify, what Germany has done. The public opinion was supportive enough to allow for the decisions. It’s possible that alternative approaches that were much more likely to be cost-effective might have been more difficult to get accepted politically. I have in mind as alternative strong support for research and small scale deployment rather than high feed-in tariffs that led to large scale deployment of inefficient solutions.
==> “Joshua asked (from austrartsua) whether renewables should be subsidized. Here again most might agree on some form and level of subsidies, but may still say that they oppose any thinking that the subsidies are unlikely to be of the kind they might accept.”
I’m having some trouble following your comment. Perhaps one too many negatives? Did you mean to say that ..many still oppose any acceptance of kind of subsidies?… or …many still feel that any level of subsidy is acceptable?
Anyway, I was trying to see whether austrartsua’s argument falls into the pattern I described here:
or whether something else was going on.
==> “Discussion generalities leads each of us to think about different realizations of the general idea and thus to speak past each other.”
I’m also having trouble following that. How do we avoid generalities? I’m not sure it’s possible. IMO, saying that any particular level of subsidizing renewables is unsustainable must be taking a generalized approach to evaluating the costs/benefits ratio of externalities. Sure, discussing generalities can lead to talking past one another, but I don’t think it has to. Likewise, over-certainty about the costs/benefits of externalities can lead to talking past one another. We certainly see that all the time in the climate wars.
So maybe the discussion has to include generalities as a starting point. It’s like the discussion of sensitivity. The discussion must begin with an acknowledgement of uncertainty in both directions.
Ambiguity is a tough nut to crack.
For the majority of the world’s population, for the feasible future, there is no politically acceptable alternative to fossil fuels. Because, for the poorer majority of the world, alternatives are too costly, and a fall in living standards will not be tolerated. For the truth of these assertions you need only to note that international conferences fail to agree to any meaningful control over fossil fuels, whose use continues to rise. Human society operates on relatively short time frames, and it is naive to believe that it is capable of successfully rising to the long term challenge of rising greenhouse gases by, in effect, rationing cheap energy.
In the end, will we not do what we always do, look for a technological solution? Are there not already studies being carried out on ways to artificially cool the planet, for example by the injection of particulates into the atmosphere? Solar radiation management techniques, reflecting a portion of the sun’s heat, are likely to be both relatively cheap and fast acting. Of course, issues such as the acidification of the oceans cannot be addressed by such methods, but that will, no doubt, be dismissed as a relatively unimportant factor.
==> “Because, for the poorer majority of the world, alternatives are too costly, and a fall in living standards will not be tolerated.”
Since when, does the fate of the poor drive governmental policies, globally? How are you measuring the human capital cost of enriching oppressive regimes in the ME? How are you controlling for other factors that contribute to poverty, to establish a causality between energy prices and standards of living in countries where no doubt, myriad factors contribute to poverty?
Another comment of mine has landed in comment prison!
Pekka, that is where I am a believer in the power of markets. The feed in tariffs created a market and that market mean that you could make profits by producing renewable energy more efficiently as the others. That leads to much faster progress as just giving some money to scientists. That will just produce ever more accurate measurements of the electrical bands of silicon. The entrepreneur will make sure that the questions that are important for the price are taken care of. The scientists care about showing they are smart and getting a nice Nature publication.
In retrospect the prices of the feed in tariffs should have gone down faster. It is hard to predict how fast the prices of renewable energy would drop due to entrepreneurial insight and innovation. If the feed in tariffs had gone down too fast, the politicians would have killed a highly popular project. It might be that they are doing that at the moment, but that can unfortunately only be said afterwards and maybe I am underestimating the power of the market.
The feed in tariffs have another important advantage for renewable energy: they deliver predictable prices. Given that the capital costs of renewable energy have to be paid in advance and the profits come later, the predictable price is important for getting credit with low interest rates. That is one of the innovations that made renewable energy cheaper. Next to a much better functioning bureaucracy that is able to approve of new installations much faster and cheaper than in the USA. I have heard claims of bureaucracy costs being double in the USA. Also something that does not go down with more research money, but only with real world implementation.
Making gasoline out of food probably sounded nice when they did the research. When they implemented it, they noticed that the population did not appreciate increasing food prices for the poor and turning more nature into agricultural land. You have to implement something before you notice what finds cultural acceptance.
I think I’d released it before you’d even written the comment pointing out that it was stuck 🙂
==> “Because, for the poorer majority of the world, alternatives are too costly, and a fall in living standards will not be tolerated.”
No one is proposing the increase the costs of energy for the worlds poor. People are proposing to develop a renewable energy system for the industrialised countries. One of the side benefits of that is that the price of solar cells has gone down enormously. This is a great help for poor people that cannot afford a connection to the electrical grid, which is very expensive in thinly populated areas such as in large parts of Africa.
Isn’t that what we are already doing? Vast amounts of R&D on renewable generation (giant yellow plugs, dude! And floating wind turbines) may not actually be a mistaken endeavour.
Messing about with aerosol negative forcing on the other hand may be problematic (Robock 2009).
Surely the logical way to tackle the problem would be mitigating the effects of CC rather than being forced into an increasingly reactive response?
The argument that decarbonisation of electricity supply in developing economies which do not yet have substantial infrastructure lowers existing living standards for the population is tendentious.
Feed-in tariffs are a direct and strong subsidy scheme. It’s market only in the sense that producing is profitable for the producer as long as cost are below the inflated price that’s offered. It gets highly problematic, when the price level is set so high that even very inefficient power plants become profitable and when it’s possible to build lots of those. Then the total subsidy sums rise to levels like the tens of billions of Euros in Germany, while the value of the produced electricity is a small factor of the price like 10-20% as it is for typical German solar panels.
In the early phase the excessive subsidies led to building rudimentary wind power plants in places unsuitable for those plants. Many of those were later dismantled before their expected life time was full, and none produced as much electricity as the cost would have required. Later wind power units were not supported as much and the siting and technology matched better, but Germany was never much further in development of wind power technology than other countries, where subsidies were less and led to better located power plants.
Then the main distortion went to solar. Here the difference between the cost and the value of the electricity has been even worse for years. Now the subsidy levels for new plants are not as high anymore, but still significant. The old really inefficient units continue to have the original price for a fixed period.
The high subsidies of wind and solar brought to the market a lot of electricity that was already fully paid, when it came to be distributed. That led to low market price of the whole sale electricity, but all private consumers and most businesses had to pay on top of that the market price the additional and large cost of the subsidized wind and solar. Thus the retail price is high in Germany, some heavy industry is paying much less (and the rest of consumers must pay even their share). The very low whole sale market price leads also problems with security of supply.
This is really far from real markets, all prices are totally disconnected from reality.
In addition this works badly with emission trading. CO2 emissions of EU are not any less than without those German wind and solar plants due to the incompatibility of the support schemes.
Western agribusiness is a machine for turning gasoline into food. You got it backwards.
Eli, that is one of the reasons why it is such a stupid idea. Sometimes more gasoline went in as out. But what came out was marketed as good for the environment. Well, maybe it was just the price we had to pay the farmers to get the conservatives to support doing something for the environment.
German will proof to be a prime example how government can ruin markets and inflict great harm to an economy, due to their renewable energy policy, you can mark my words. Its rather good economic position up to now, is due to other factors, in play for decades, such a labour law reforms by Schroder and a ongoing unification of the country. Not for long and they will have to pay a large price for the current policy.
I, as an investor in solar, am strongly against subsidies and public spending on solar companies. It has in my opinion sickened the industry by propping up weak companies, even bailing them out when they should bankrupt, and thus creating continuous oversupply. Strong, well lead companies with promising technology fail to expand as much as they can, because weak competitors continue to exist and gobble up precious market share and run their wealth destroying activities with public money, whilst from an economical and technological standpoint they are dead ends.
so, your prediction is that “great harm” will come to the German economy. Interesting.
Care to predict how much and compared to what?
Here’s my prediction:
The overall effect on the German economy of its energy policy will be negligible. Specifically:
1) Germany will grow more strongly than the Eurozone as a whole over the next decade
2) In 10 years time Germany’s GDP per head will continue to be ahead of that in the UK.
What will happen to the German energy policy seems to be an open question. Discussion on, how it should be developed and changed seems to be more active than before because of several problems with it. Some signs of that are discussed in this article of Die Zeit. By coincidence two influential German scientists involved quite strongly in the energy policy issues visited Finland recently and I had the change of discussing with both. Neither one is really opposed to Energiewende, but both were involved in figuring out ways of resolving rather serious problems in the working of the policies in practice.
The problems that they were involved in are of such nature that I don’t think that they can be resolved without really major changes in the policy mechanisms. The unwanted side effects of the present policy structure are too serious and too difficult to correct without major changes as far as I can see.
European climate policy
Worse than useless
Current policies are a mess. Here’s how to fix them
“The renewables policy also undermines the carbon market—the EU’s emissions-trading scheme (ETS), on which companies trade the permits their governments give them to emit carbon. The trading system is designed to ensure that each tonne of carbon is saved at the lowest cost. But when electricity generators cut emissions under the renewables programme, they end up with more ETS allowances than they need. They sell the excess to other users, who can then emit more carbon than before, so the renewables target does not reduce emissions. But it increases the effective supply of permits, which pushes down the price—now languishing at around €5 a tonne, while companies are cutting emissions at a cost of over €150 a tonne under the renewables programme.”
victorpetri: So we can count on you to end heavy heavy subsidy of Nuclear and Oil and Gas then? Tankers world wide are pretty much uninsured, as are nuclear reactors.
Why should I personally have to pay because some numpty can’t afford insurance? Or worse.. they will behave as though they only have to prevent accidents under their coverage. That’s criminal!
Yup Victor! End subsidy for nuclear and oil! Or do you support that kind of corporate welfare? Its not like we haven’t been contributing for 50 years or more.
I was recently attempting to sell the idea to a group of conservative commenters that the growing global renewables market is an opportunity the US should want to lead in technical innovation. I noted that we have recently lost worldwide market share in windmill delivery and unflinchingly pointed out that seemed incompetent to my eyes. It did not go over well.
From that same group and others I often hear that the greens want to wreck the economy with radical changes to energy policy. Not wreck it with ill-conceived policy, but actually wanting to wreck it. This is not exactly fair to them, but I often wonder if they’re looking in the mirror when they write such things.
Again this? You have memory problem?
I am missing your point. I am against governments appointing favorite industries they think should or will be important in the future. I think it’s a waste of money.
Victor Venema writes (in reply to me)
“Well before the time that such a conflict has any influence on the production of oil, the prices go up. Even if the conflict in the end does not influence the production at all. If you want to fully ignore the future, like you seem to want to do, you will not allocate goods efficiently.”
I have said nothing about what I want to do, rather what markets tend to actually do. Conflict in the middle east produces fear right now and thus is not a future force, but a present force perturbing the market.
Eli points out that certain persons can play the market, futures and short-selling, but such things are not part of the market per se, there is neither profit nor production costs in the stock market nor in arbitrage, in fact — these gambling schemes depend on the operation of a normal, predictable market.
Some overlap exists and this blog is not perhaps intended to replace a college course in economics. It is certainly the case that a buyer can contract for later delivery at a today-price; in which case he is gambling. But unless he is a price maker (ie, a really big buyer such as Walmart), he must take the price as it exists at the moment OR as he and the seller guess as to its future price.
Either way, neither the buyer nor the seller are automatically going to include externalities in their guesswork. Governments compel such inclusion and suddenly the market is not “free”.
Nor have I ever said “free markets” (totally unregulated) are “good” but the limited, binary-thinking mode of many here seem to snap from totalitarian (good) to libertarian (bad) with no room for nuance or modest government regulation (ie, the commerce clause of the United States Constitution authorizes some government intervention).
“Another necessary condition for markets being efficient is well defined property rights. You cannot dump your waste in your neighbours garden.”
Agreed. That is why John Locke renders it “Life, Liberty and property” (as I understand it anyway) rather than “Life, Liberty and the Pursuit of Happiness.”
“Even if that lowers your production costs and consumers benefit from the low prices. In the same way you cannot dump your CO2 problem onto other people (now and in the future). We need a government to guarantee property rights for markets to be efficient.”
However, I believe it improper to unilaterally decide that something naturally existing and vital for plant life is suddenly a “problem”. But even if it is, a certain amount of intrusion is inevitable in human society (or animal for that matter). The very existence of my neighbors, no matter how civilized, creates limitations on my freedoms. At some point I must accept your carbon dioxide and you accept mine since there’s no way to segregate mine from yours.
Until recently the same principle existed for cigarette smoke and other nuisances, and in most places, this is still the case. I’d much rather breathe your carbon dioxide than your cigarette smoke, beer breath or flatulence; but how far shall society go to restrict such things? Well we already have an answer for that — New Zealanders paying a fee for sheep flatulence.
I have previously pointed out in the writings of Thomas More’ how governments use this sort of strategy as a revenue producer — ban a common thing, then fine people for using it or issue licenses. The more “common” the thing to be banned the more lucrative the revenue. All it takes is for this “thing” to be declared a pollutant and suddenly the government can ban it, fine violators and issue licenses. It is a no-brainer and no American gets to vote on it.
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