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Articles filed under Climate Change


Money is Not the Measure of All Things

I think there is a compelling case that if we were to use the best estimates from the IPCC and similar technical bodies for the most likely impacts of Anthropogenic Global Warming (AGW) on average global GDP over the next century, then proposed programs of emissions mitigation are not economically justified. Many very smart bloggers have made the point that that using average global GDP as our only metric to evaluate the relative attractiveness of potential future outcomes misses a lot of what should be important to us.

I believe that there at least two intertwined strands to these objections:

1. Average GDP misses a lot. We could wipe out the GDP of many poor countries, and still only have a small impact on global GDP, and it doesn’t seem fair to consider lowering U.S. GDP by a fraction of 1% on one hand, and entirely eliminating the country of, say, Bangladesh on the other, as equally bad in some important moral sense.

2. GDP misses a lot. There are many things that we care about that are not captured in GDP statistics, such as human health or suffering, maintaining traditional ways of life, aesthetic beauty and so on.

I’ll try to address these one at a time. I’ll rely heavily on papers by Indur Goklany in which he integrates multiple analyses, predominantly from the IPCC and the UK government.

1. Relative economic impacts on the developing vs. the developed world

There is some trade-off between economic growth and mitigation of AGW damages, at least in the short-term. Mitigation advocates often correctly point out that the global poor will be disproportionately affected by AGW damages, but it is also the case that they will be disproportionately affected by reductions in global economic growth. An empirical question is the relative size of these two effects.

Consider Goklany’s review of research that compares the change in climate and wealth under various UN IPCC scenarios for development over this century. I’ll show the two extreme scenarios to make a point: A1F1 (the IPCC scenario for global development that is most heavily dependent on fossil fuels, and has a projected increase in global temperature of about 4C by the end of the century), and B1 (the scenario that assumes greatest deployment of alternative technologies, and has a projected increase in global temperature of about 2C by the end of the century). Here are the projections for each scenario for the developed then the developing worlds:

Developed Countries Projected GDP / Capita in 2100:

A1F1: $107,300 B1: $72,800

Developing Countries Projected GDP / Capita in 2100:

A1F1: $66,500 B1: $40,200

In other words, at least through the next hundred years, the average person living in the developing world is better off in money terms with more economic development and more AGW damage, on net. A lot better off in fact: $66,500 is more than 65% higher than $40,200.

I’ll note in passing that by 2100 the average person in the developing world is projected be at a level of income comparable to the U.S. in 2009.

2. Impacts not directly captured by GDP

I’ll focus first on two items which any reasonable analyst would consider to be important, and for which we have some projections: hunger and water.

Goklany has collated detailed projections for the projected change in various metrics between a baseline year of 1990 and a projection year of 2085 from the UK Government’s Fast-Track Assessment of global climate change (FTA). This is a 95-year projection, and as there should be some acceleration of warming effects this should be a tolerable estimate for impacts for the highly-overlapped 91-year period from 2009 to 2100.

Here are the results for projected humans at risk from hunger under the A1F1 versus B1 scenarios:

Under either scenario, the world should be able to push those at risk for hunger down to 1% – 2% of the world’s population by the end of this century, at any projected level of warming. The realistic risks to this are war, other political action, or threats to a world of interdependent trade and economic growth. The impact of global temperature change is rounding error in comparison.

Here are the results for humans at risk of water stress:

Because wealth allows us to insulate ourselves from environmental risks, a warmer but richer world is projected to be better off on this metric.

Here are some other metrics. The percentage of the world’s population that is at risk for coastal flooding is well under 1% in the baseline, and is not projected to rise close to 1% in any scenario within the 95-year forecast. Malaria deaths have historically been in effect eliminated by societies that achieve several thousand dollars per year of per capita income – the key risk here is once again slower economic growth that keeps parts of the developing world poorer longer.

Again and again, we see the same pattern: at least for the next century, changes in human welfare, even on metrics that are not purely economic, are fundamentally driven by changes in economic development, not AGW damages. This is why it makes sense to be focused acutely on risks to economic growth when considering the overall effects of any emissions mitigation program.

What Are The Stakes in The Climate Change Debate?

Here is one straightforward way to put this in perspective.

1. Let’s start with a very long-term and global perspective of total present value of expected global income over the next several hundred years.

2. Then, estimate the total expected present value of damages expected to be casued by Anthropogenic Global Warming (AGW) over this period.

3. Then, estimate how much of these future warming damages we could avoid at a cost less than the avoided damages, assuming a globally-harmonized, optimally-designed and optimally-executed emissions mitigation program (say, a global carbon tax).

4. Then, subtract the expected costs of this mitigation program from the expected future avoided damages to come up with the bottom-line estimate of the expected net present value of the best-possible emissions mitigation program.

Using Nordhaus’s canonical analysis, here is what these four numbers look like:

The total net expected benefits of the best-imaginable program to combat global warming are about $3.4 trillion. This is about 0.17% of the expected present value of total global income.

Compare the current Waxman-Markey bill to “an optimally-designed and optimally-implemented” carbon tax. Consider what it would be like, in the real world, to cut a global deal. Now consider what it would be like to enforce this for more than a century, not only in Sweden, Japan and Australia, but in China, India and Brazil. Compare this to “a globally-harmonized, optimally-designed and optimally-executed emissions mitigation program.” Do you think the economic drag the real-world deal would create might cause the planet to lose more than 0.17% (or for that matter, 1.7%) of the present value of future income as compared to the case without such a deal? It is extremely likely, in my view.

Numerous very intelligent bloggers have raised the valid point that global GDP, or any measure of money income, is not a comprehensive measure of human well-being. I’ll have a future post on this topic. But it is striking that, at least when looked at in terms of the economy, we should expect the benefits of emissions mitigation to range from losing money (my view) to a positive gain of 0.17%, assuming perfection.

The problem is that we’re putting a global economy with present value of $2,000 trillion at risk to go after less than $4 trillion of expected present value of benefit. The desire to regulate the global economy to avoid the risk of catastrophic climate change is not a one-sided bet.

Re: What's The Point?

Almost exactly a year ago I wrote a post in which I tried to predict the course of the climate change debate. In it I said this:

Given current projections, the costs of restricting emissions just can’t be justified based on the benefits that it is projected to provide.

As far as I can see, proponents of emissions reductions will respond with four arguments: (1) inflate the analyzed costs of global warming by claiming the science actually now says things will be even worse than we previously thought, (2) inflate the analyzed costs of global warming by embedding indefensible discount rate assumptions in the black box of econometric calculations used by economists to conduct the cost-benefit analysis, (3) deflate the analyzed costs of emissions mitigation by claiming a free lunch – that there is a cost-free or low-cost way to radically reduce emissions, and/or (4) turn this into a moral crusade asserting that we have a moral duty to the poor of the world because of our past sins of emission. I have laid out responses to each of these objections: 1, 2, 3 and 4. When considered carefully, emissions mitigation proponents have no persuasive arguments.

Conor Clarke has a written a post in which he manages to combine two of these arguments at once.

Claiming the science actually now says things will be even worse than we previously thought? Here’s Conor:

It’s possible to quibble with Manzi’s data. (More recent temperature estimates than the IPCC’s exist: You can check out the work of MIT’s Joint Program on Global Change for more.)

Check.

Turn this into a moral crusade asserting that we have a moral duty to the poor of the world because of our past sins of emission? Here’s Conor:

The big costs of global warming will fall overwhelmingly on developing nations with dense, coastal populations. You can be a realist about those costs — why on earth should America care what happens to Bangladesh? — but the costs are still real. They are also, by and large, not costs for which the developing world is responsible.

Check.

The thing is, I agree that these are significant considerations – they’re just not as obvious as Conor asserts they are, and I think a useful analysis of the problem requires confronting the strongest arguments around both issues. I’ll just start by referencing the counter-arguments from my earlier post. And before anybody gets on a high horse about how CO2-laden economic development is such a threat to the poor of the developing world, he really ought to have a response to this analysis.

Re: How Much Would You Pay for Cap-and-Trade?

Derek Thompson has a post up which reproduces Nate Silver’s graph estimating that the break-even price for the average American to support solving AGW is about $19 per month, or not much more than CBO and EPA estimates for the costs of Waxman-Markey through 2020. This is almost certainly an accurate representation of polling reesponses, as it is closely consistent with the results that an MIT group has gotten for five years or so as they have nationally-represnetative polling on a very similar question.

However, here are a couple of severe problems with the implications of this post:

1. The most obvious is that responses such as this to a pollster, or commercial survey, are notoriously inaccurate predictors of behavior.

2. The more fundamental is that Thompson and Silver compare this response to the CBO projection of costs for Waxman-Markey as of 2020, which is many decades prior to the point at which it would even theoretically create significant benefits. In order to actually achieve its goals, it would have to be in place for many, many decades. By that point, its costs would, according to the EPA and any other competent analyst, be far higher, in absolute and % of income terms.

The Visual Display of Quantitative Information II

Conor Clarke accepts that:

I think Jim Manzi and others are right to say — if you believe the IPCC and CBO — that the U.S. won’t experience a climate-induced decline in GDP until 2080 or 2100.

But Conor goes on to argue that the costs that Waxman-Markey is expected to impose on American consumers by 2050 – about $1,1,00 per household per year, or a little less than 1% of total consumption – are pretty trivial, because we should expect to be so much richer by then. (I’ll note in passing that, as per my posts on this, there are very good reasons to believe that the EPA cost estimate is low, and also that costs are also virtually certain to rise between 2050 and roughly 2100 when we would expect to start getting some offsetting benefits.)

He then shows a chart making the point, basically, that 1% is a small fraction of 100%. But of course, this cuts both ways. We hear constantly about the existential threat posed by global warming – Cities underwater! Drought! Famine! Think about his graphic. The expected benefits don’t even outweigh these costs. That ought to make you stop and think.

But, you might say, that is because we are taking a parochial view that only looks at the U.S. and only the next several decades (which is a pretty broad definition of parochial). We need to consider our actions as stewards of the entire planet over at least a century. OK, let me do a very simple chart for you, built from a list of simple, validated assumptions:

1. Secular long-term global growth in real per capita consumption before considering any effects of global warming is about 1.3% per year. (This is a standard conservative estimate; it has averaged about 2.5% per year over the past half century).

2. Unrestricted global warming produces a global temperature change of 4C within a hundred years (which is quite aggressive, a better middle-of-the-road estimate is about 3C).

3. Economic damages from this temperature increase are equal to 5% of GDP (which is the top end of IPCC’s estimated range for 4C of warming).

The following chart shows what income an average person on earth has today, plus the same number in constant dollars for (i) 2110 with unrestricted global warming, and (ii) 2110 if we somehow magically eliminated all damages from global warming for the entire world at zero mitigation cost, labeled “2110 w/ no AGW”.

The expected impacts of human-induced climate change are marginal as compared either to the sloppy, sentimental and self-righteous rhetoric that surrounds this issue, or as compared to the potential reduction in global material well-being that would likely be created by ham-fisted attempts to substitute political allocation of resources for markets.

Dear Member of Congress: Why You Should Vote Against Waxman-Markey

It appears that years of debate about climate change and energy may now come down to a vote on an actual bill, the American Clean Energy and Security Act of 2009 (ACES). As I write this, the vote is scheduled for Friday. If it occurs, you will be asked to vote to implement carbon rationing in the United States.

Without regard to party or ideology, I believe that the evidence is clear that this law would be contrary to the public interest. Here is why, in a nutshell:

1. It would be a terrible deal for American taxpayers. According to the Environmental Protection Agency, it is projected to impose annual costs of about $1,100 per household (a little less than 1% of total consumption) by 2050. The benefits we will get in return? If the law works precisely as intended, in about one hundred years we should expect surface temperatures to be a about one-tenth of one degree Celsius lower than they otherwise would be. The expected costs are at least ten times the expected benefits, even using the EPA’s cost estimates and assuming achievement of the primary goal of the legislation.

2. The argument that “OK, it’s a terrible deal standalone, but we need to lead the world by example” is extremely unconvincing. First, while you are probably not a climate science expert, I bet you’ve negotiated a few things in your life. What do you think about the negotiating strategy of unilaterally giving away our most obvious leverage – namely “we’ll reduce our emissions if you reduce yours” – and instead hoping that those nice men who rule China will be guilted into sacrificing their perceived economic self-interest if we just go first? Second and more fundamentally, as per many detailed analyses, the global deal that we would theoretically be chasing isn’t even attractive, even if we assume every technical climate change prediction by the UN IPCC is correct.

3. Contrary to early expectations that auctioning cap-and-trade permits would generate $80 billion per year of government revenue, this law would not contribute materially to deficit reduction. You’ve seen the internal negotiations up close. Because so many allowances have been given away to special interests to try to get the votes needed to pass ACES, the CBO now estimates that it will bring in a net of a little over $2 billion per year over the next decade. As you know, this is about one one-thousandth of this year’s budget deficit.

4. A further effect of all of these deals (which are entirely predictable in a democracy) is that ACES is very unlikely to achieve even the limited benefits that are claimed for it. The details of the bill mean that there is now not a hard cap on emissions for at least the first decade of its existence. What do you think the odds are that this will change at some undetermined point in the far future when all of the normal interest group pressures of a democracy are supposed to magically disappear?

5. In short, Waxman-Markey would impose costs at least 10 times as large as its benefits, would not reduce the deficit, and doesn’t even really cap emissions.

(cross-posted to The Corner)

Prediction Model Bias

Brad Plumer provides a very practical reason why he believes environmental cost predictions tend to be over-estimates:

[M]arkets always tend to be smarter than these forecasters, and adjust in ways that no one expected.

Let’s assume arguendo that this is correct (and I think it is, as a general statement about markets vs. planners – I’m about as Hayekian as they come). This leads to two questions, one far more important than the other.

1. The narrow point is that, per prior discussion on this, if one could actually observe a reasonably consistent over-estimate in a provably-relevant reference class of prior predictions, this would lead a competent forecaster to make a transparent “topside” adjustment to get a best-available forecast.

2. The more important point is that this same logic ought to apply to the damage estimates that similar bodies forecast for the costs of climate change. That is, markets should be smarter than forecasters think when it comes to adapting to climate change as well (e.g., crop selection, transitions to other economic sectors, clever infrastructure developments and so on). To only focus on this kind of error on one side of the cost / benefit calculation is loading the dice.

Climate Change Back-and-Forth

I’m glad to see that Megan McArdle is confronting the reality that Waxman-Markey is very unlikely to work, either in the sense of providing benefits greater than costs, or in the sense of achieving anything like its stated goals, even without regard to cost.

I’m also glad to see that Ezra Klein is explicit about his acceptance that climate change is expected to have extremely limited effects on the United States for at least the next hundred years. I figure that ought to be pretty important when debating the proper policies for the government of the United States. On the other hand, we continue to disagree about the financial efficiency of the foreign aid program defined by transforming the energy sector of the American economy in order to very slightly ameliorate a predicted problem that might affect people who might live in low-lying equatorial regions of the world decades from now.

Ryan Avent, on the other hand, refuses to see the light. If you want the background to this post, there is Ryan, me, Ryan, me, and now this one from Ryan. This will be my last turn at bat on this one.

In his latest reply, Ryan starts with this:

One thing that recurs in Manzi’s writing on climate change issues is an extreme devotion to the infallibility of models.

Here is what I said in what I’m pretty sure is the first thing I ever wrote for publication on climate change:

Over the past several decades, teams in multiple countries have launched ongoing projects to develop large computer models that simulate the behavior of the global climate in order to account for feedback effects. While these models are complex, they are still extremely simplistic as compared with the actual phenomenon of global climate. Models have successfully replicated historical climates, but no model has ever demonstrated that it can accurately predict the climate impact of CO2 emissions over a period of many years or decades.

Climate models generate useful projections for us to consider, but the reality is that nobody knows with meaningful precision how much warming we will experience under any emissions scenario. Global warming is a real risk, but its impact over the next century could plausibly range from negligible to severe.

In fact, I think it is fair to say that the idea of uncertainty in our predictions has been central to my entire argument on climate change from the beginning.

Ryan goes on to criticize my point that if we really have a track record of consistent prediction error, competent modelers should be able to incorporate that information into forward predictions:

Just because Doug Elmendorf can probably say that he’s going to overestimate the costing of Waxman-Markey doesn’t mean that he can say where and by how much, with the level of methodological surety necessary to allow him to include an adjustment of some sort. Manzi seems to convey the idea in his work that such a state of affairs ought to render a piece of information unusable, or irrelevant. But that’s a strange way to approach a problem — any problem.

Sorry, that’s not a strange way to approach prediction at all. If I make a string of 100 predictions using method X for how many runs the Mets will score in their next game, and my prediction is always exactly one run low, it would likely be intelligent to modify my method to be whatever X produces plus one run. The complexity, of course, is that I’m not always one run low, but I’m one run low on average. More fundamental is the reference class problem in such an adjustment: is it that my model tends not to work as well for home games, or is it games on weekends, or is it games in which Y pitches and so on. This is the substance of the nerdy debates about predictive modeling.

If you look across his posts on this topic, Ryan is trying to argue three things simultaneously: (1) we should take this cost forecast as important because the CBO produced it; (2) there is an unambiguous track record of environmental cost over-prediction which is simple enough that as consumers of this prediction we can reliably reduce the CBO forecast by some non-zero amount; and (3) the CBO failed to use this information in producing their forecast. Sorry, I’m not buying. I agree that there is lots of uncertainty around any such forecast, not that there is a sufficiently reliable forecast bias that we should treat this as an inherent over-estimate.

Ryan goes on to say:

You see this with his discussion of cost-benefit analysis in general. People say to Manzi, well, what if the predictions are off? Manzi replies, but of course, the modelers have thought of this and have built probability distributions to include all these difference possibilities, so when you ask “what if they’re off” you’re really asking “what if something happens that’s outside the distribution,” which means you’re just invoking the precautionary principle, which is daft, etc.

This paragraph is pretty accurate, other than the last part. It’s not true that I’ve equated worrying about the danger of “something outside the probability distribution” with “the precautionary principle”. I have consistently characterized the idea that climate change damages could be worse than the worst-case scenarios projected by the IPCC as a real danger, but argued that we must set this in the context of other dangers, and consider the costs of trying to forestall it in comparison to benefits. The precautionary principle, on the other hand, goes far beyond recognizing the realistic possibility of such an outcome, and instead proceeds all the way to the fallacy of the one-sided bet: the idea that we should bear almost any cost in return for almost any reduction in the expectation of such an outcome.

Nice Try II, ctd.

Ryan Avent responds to my post with a list of six objections. I’ll try to take each in turn:

First, it’s news because it’s the CBO.

Fair enough. A second organization has confirmed a cost estimate already produced by the EPA. A cost estimate, by the way, which was incorporated into a cost/benefit analysis at TAS that shows a very poor payout for Waxman-Markey.

Second, the cost overestimates have nothing to do with any underlying issue bias; as Brad Plumer notes, those favoring and opposing regulations both historically overestimate costs.

Presumably the same awareness of the track record of asserted prior under-estimation of environmental costs was available to both the EPA and CBO as they prepared their cost estimates. Unless we wish to assert that they are biased or simply irrational, why would we assume they failed to incorporate this information into their (very similar) forecasts of costs by 2020?

Third, the EPA report estimates a net present value cost of the legislation in 2050 at between $140 and $180 per household.

Not disputed, but also incorporated in and not contradictory to the prior cost/benefit analysis. Be wary of the counter-intuitiveness of present value calculations that are conducted over many years.

And fourth, these estimates don’t include the benefits of reduced warming.

Not disputed, but also incorporated in and not contradictory to the prior cost/benefit analysis.

And fifth, even Manzi’s stated cost is below the bunk cost estimates GOP legislators throw around.

Also, not disputed, at least in some cases. But, again, not contradictory to the cost/benefit analysis.

And sixth, Manzi still thinks we have no obligation to reduce our emissions, even though the costs associated with our carbon output will overwhelmingly be felt by the global poor, who are least able to do anything about it.

That’s not exactly true. I do not believe that we have an unlimited obligation to do this, as per numerous prior posts on this topic here at TAS.

Nice Try II

Kevin Drum, Matt Yglesias, Ryan Avent and Ezra Klein all point to a recent CBO report that predicts the cost of Waxman-Markey to an average American family will be about $175 per year by 2020 as news. And further, as news that undermines any claim that emissions abatement will be more than trivially costly. Messrs. Ygelsias and Avent did follow-up posts asserting that this is likely a gross overestimate of the costs.

First, this isn’t news. As per my post of about a month ago (helpfully titled “Waxman-Markey Cost Benefit Analysis”), this is consistent with the earlier EPA cost prediction of about $160 per household per year by 2020. Technically, the new CBO prediction is about 10% higher.

So what’s the problem? Doesn’t this mean that opposition to Waxman-Markey on cost / benefit grounds is blind and uniformed? The problem is that achieving the benefits of Waxman-Markey would require that the emissions abatement continue long, long past 2020. Costs will continue to rise decade after decade. The same EPA report projects that the average cost per household will be about $1,100 per year (equal to a little less than 1% of total economic consumption) by 2050. That’s according to the EPA. Who I’m sure are grossly over-estimating the costs of environmental protection, just like those other anti-environmental crazies at the CBO.

Nyet So Fast

Kevin Drum, someone I have always considered to be an exceptionally smart and sensible blogger (for Mother Jones!), criticizes my recent post on Waxman-Markey, saying that the reason the Democratic sponsors are being held hostage by their fellow party members representing midwestern and mountain states is that:

Republicans have cynically decided nearly en masse to blindly oppose any action on climate change whatsoever.

But why is this opposition “cynical” and “blind”? What if it’s “principled” and “informed”?

I’ve tried to lay out why I think there is a principled, informed case for opposing Waxman-Markey in some detail in a post that the one Drum references links to. Drum says that he takes “a more generous view of Waxman-Markey than Manzi”, but it seems to me that a whole lot turns on who is right on that question.

The Deep Cynicism of Waxman-Markey

I’ve written a lot about why I believe that even if one accepts that Waxman-Markey will accomplish its stated goals for greenhouse gas emissions reductions via a cap-and-trade mechanism, it would still be a very bad law.

At a practical political level, as far as I can see, the fulcrum of the debate is among midwest and mountain state Democrats. The Republicans (excepting the senators from Maine) seem solidly against it, and most coastal Democrats solidly for it. The legislative strategy appears to be to cut whatever side deals are necessary to get the swing Democrats to support it. This mostly has meant giving away special allowances and spending programs to pretty much every industry or region that actually produces greenhouses gasses at sufficient scale to play the lobbying game.

There does not seem to be any line in the sand that they will not cross. At this point, the side deals seem to have consumed the cap. That is, when you look under the hood, there is not really a material binding cap in this bill for at least a decade. Nothing is left but the political rents. This is basically why the CBO now estimates that all those net revenues from auctioning ration cards that were going to help offset our structural budget deficit are not going to be there. In fiscal terms, Waxman-Markey will bring in almost nothing. We’ve given it all away.

Informed activists look to the various clean air and water acts, and argue by analogy that we just need to get the structure in place, and then over decades, as with those bills, work the courts, staff the regulatory agencies with true believers, pass occasional amendments in Congress and so forth, in order to tighten the limits. This logic is an extension of the “We need this deal, even though it looks terrible on a standalone cost-benefit basis, so that we can get the rest of the world to go along with binding caps” to something like “We need to pass an ineffectual law to set up a structure that over time can be used to create an effectual law that is still terrible on a standalone cost-benefit basis, so that we can then use this to persuade the rest of the world to go along with binding emissions caps”. Talk about your bank shots.

But beyond this, I think this analogy is mistaken. This is less like the Clean Air Act than it is like a new corporate income tax. It comes with a set of powerful rent-seeking entities with strong incentives to keep very high theoretical rates in place, while carving out exemptions for themselves. It’s hard to imagine a structure better designed to reward lobbyists, large industries and members of Congress, and less likely to efficiently reduce greenhouse gas emissions.

Discount Rates and Academic Mau-Mauing

Will Wilkinson ably takes on the idea that economists have a whole lot to say about what discount rates should be used in comparing costs and benefits in the debate over global warming. I have a more aggressive take: I dispute that we should care about discount rates, per se, at all.

Let me start with a stylized example to illustrate why. Suppose you were presented with two alternative policies to deal with global warming, A & B. A is roughly speaking, do nothing, and B is roughly speaking, a stiff global carbon tax. Let’s further assume that scientists, agronomists and so forth have constructed a good estimate for the GDP of the planet for each year 2010, 20011, and so on out to, say, 2260 (i.e., 250 years from now). That is, you have for policy A a list of 250 numbers, each of which is the projected global GDP for each year; and you have an analogous list for policy B. Let’s further assume that global GDP over the next 250 years is all you care about, and that these are the only two options. You are emperor of the world. How would you decide which policy to pursue?

One way to do this would be to create a “discounting function”, of greater or lower complexity, that can be applied to any list of GDP estimates by year to generate one number, the present value of this list. You could apply this discounting function to the list of projected GDPs for options A and B, and then choose the policy that has the higher present value. Alternatively, you could simply look at the two lists of GDP projections for policy A and policy B side-by-side, and choose the one that you think is better. In the example given, I would always employ the second method.

Why should I believe that there is any discounting function relevant to global warming that exists in closed form? I have a set of preferences for comparing current to future scenarios of projected costs vs. benefits. Much of the knowledge that informs this set of preferences is tacit and/or contingent on elements of the scenarios that I didn’t list comprehensively in advance, but react to as I am presented with specific scenarios. This is of particular practical importance in a case like global warming which operates across a scope – centuries of time across the globe – in which many of the embedded assumptions that I use when making discounting assumptions in day-to-day life will likely be violated. If an economist can’t find a function that encompasses these, I’m not necessarily irrational; the economist just can’t model my beliefs in a way that he finds convenient. The discounting function is merely a heuristic, not some straightjacket that I have agreed to be bound by just because I haven’t disputed its assumptions.

The primary practical use for these discounting functions in global warming analysis is to have a function that allows integrated environment-economics models to search a wide space of possible policies automatically with a commonly-applied set of explicit assumptions without requiring human intervention to consider each model run. When it comes time to look at the policies that the model says are best, I would always want to see the actual data by time period for a variety of “good” scenarios to determine what policy I think makes sense.

Think of these models as being like a Google search. With infinite time and patience, I could review every document on the Web, but I have only finite time. The Google PageRank algorithm imperfectly, but usefully, narrows down the number of documents I need to review; usually, however, I don’t use the “I Feel Lucky” button, and certainly would not in a case where my life depended on it.

Yet More on Waxman-Markey

Ryan Avent has criticized my take on Waxman-Markey at The Atlantic, so I have responded at the same place. He raises some points that some TAS commenters have as well, so I thought I would link to it here. And also becuase nobody is bored of this yet.

The Emperor's New Cap-and-Trade Clothes

Patrick Appel at The Daily Dish has put up two more responses from readers to my post on costs and benefits of Waxman-Markey.

I’ll focus first on one important point that they both made. The first says:

[W]e all understand that if China and India and all the other big emitters stay on sidelines, it is wasted effort. So, the stated “benefits” of Waxman-Markey, looked at in this way are of course near zero.

The second says:

Manzi is largely correct on his central point: Waxman-Markey’s emissions targets, if adopted only by the United States, will likely lead to a net economic loss for the United States, because the avoided temperature increase will be so small.

So before we move on, let’s note that my critics all seem to agree that if Congress passes this law, and we do not subsequently get agreement by the rest of the world (i.e., parties that Congress can not compel) to also reduce emissions, then the Waxman-Markey bill will create net economic losses for the citizens of the United States. Apparently everyone already knew this, but I guess I like to emphasize the obvious.

The first correspondent goes on to say:

…not all leading economists working on this issue think it will cost a lot (in terms of economic impacts). It won’t be free, but it is not going to drag the economy down. Every analysis I’m aware of shows some reduction in overall economic growth of at most a percent or two – the baseline continues to grow. So rather than being 100% wealthier by set date, we are only 98 or 99% wealthier.

I provided a link to specific present value calculations for this trade-off under the assumption for global agreement in my post. I guess if you want to wave your hands and say that “a percent or two” of U.S. economic growth is no big deal, you’re free to do so. I think that’s a whole lot of money.

The second makes explicit the point that the essence of this proposal is to impose large economic costs on American taxpayers for the sole purpose of providing a negotiating advantage in getting the rest of the world to do the same. He starts by saying that if we could structure such a global deal that I would agree that “it looks pretty god”:

However, if W-M becomes a model for the rest of the world, it starts to look pretty good, even by Manzi’s own standards.

This is not correct, at least by “Manzi’s own standards”. As per the first several paragraphs of my post, I believe strongly that such a global deal would not create expected net benefits for the world as a whole, never mind for U.S citizens. I won’t repeat that entire part of the post, but will just refer back to it. This correspondent suggests my “own math suggests I’m wrong”. He doesn’t explain why this is so, other than by referring to somebody else’s analysis. Once again, I linked directly to the research document that substantiates my claim that the global NPV benefits of an optimal emissions mitigation program has an expected value equal to 0.2 percent of future global consumption. As far as I can see, this analysis remains unchallenged. My argument is that we will never have such an optimal system in the real world, and that economic drag created by non-optimality will create costs that are much larger than 0.2% of future consumption. This argument also seems to me to be unchallenged. The fact that another party has done some other calculations that I have not reviewed, endorsed or deployed doesn’t really seem to me to address this argument.

So let’s review the overall bidding, at least as I see it:

1. Everybody agrees that if Waxman-Markey becomes law, and it does not lead to a global, binding and enforced agreement to severely reduce global greenhouse gas emissions, then it makes U.S. taxpayers worse off economically.

2. I have presented an economic argument that even if such a global agreement were achieved it would accomplish in the best case a net increase in NPV of global consumption of 0.2%, and a practical argument that it would almost certainly reduce global economic welfare. These specific arguments remain undisputed.

3. Those who argue that Waxman-Markey would lead to a global agreement have provided no evidence that it would have this negotiating effect, and are presenting what is, at best, a pretty idiosyncratic negotiating premise that by giving away our leverage as one participant in a collective action problem we will somehow increase our ability to get others to sacrifice on our behalf.

Responses on Waxman-Markey

Patrick Appel at The Daily Dish has kindly linked to my Waxman-Markey post and (equally kindly) sought counter-arguments. He has put up one response (mostly linking to a couple of Real Climate and Climate Progress posts) without comment. I’ll try to comment on it, one paragraph at a time.

A reader points me to wiki profile of Chip Knappenberger.

I cited Knappenberger’s analysis for one purpose: prediction of the temperature impact of Waxman-Markey in the year 2100. I used this one source because it was the only such climate model prediction of which I am aware for this specific bill. He used the MAGIC model (which is the standard model for such analysis), linked to the site where you can download it yourself, and specified the parameter assumptions. I have done similar back-of-envelope math on this specific prediction myself, and get a very similar answer. I welcome any competent GCM-based alternative predictions, and will happily modify my analysis based on an improved forecast. I think you will find, however, that no such credible forecast will change the conclusion of the cost-benefit analysis.

…it is just absurd to claim that “the Earth has actually been cooling for the last 7 or 8 years” when the 2010s will easily be the hottest decade on record (see “Very warm 2008 makes this the hottest decade in recorded history by far“). Also, the warmest year on record was 2005, according to the U.S. temperature dataset that best measures total planetary warming, the one from NASA’s Goddard Institute for Space Studies (see here)

At no time have I disputed the scientific basis for AGW. I have used only UN IPCC forecasts whenever available (and cited them down to page and table numbers).

Second, the cost to the economy and the taxpayer is very low according to every independent study (see “Intro to climate economics: Why even strong climate action has such a low total cost — one tenth of a penny on the dollar” and EPA Analysis of Waxman-Markey: “Returning the revenues in [a lump-sum rebate] could make the median household, and those living at lower ends of the income distribution, better off than they would be without the program”).

I used the exact EPA forecast that is referenced in the above paragraph, and cited the specific table where you can find it for yourself. This projection incorporates the assumption of a lump-sum rebate, as per my post (as unrealistic as I believe such an outcome actually is in the real political world).

And strong climate action could actually have immediate benefits for our economy according to one of the nation’s top economists (see Nobelist Krugman attacks “junk economics”: Climate action “now might actually help the economy recover from its current slump” by giving “businesses a reason to invest in new equipment and facilities”). And that is entirely separate from the crucial need for comprehensive energy and climate legislation like Waxman-Markey to restore US leadership in clean energy through , which will be one of the biggest job-creating industries in the world in the coming decades.

Once again, I used the EPA’s forecast for net economic costs (prior to any benefits created by avoided warming damages). I used the IPCC’s estimate for the size of the damages from avoided warming that should be netted against this. They really ought to take up this debate with the EPA and the IPCC.

Finally, of course, we have the “analysis” that says if the United States acts alone, we can’t solve the global warming problem. Well, duh. In fact, all of the other developed countries committed more than a decade ago to restrict their emissions — and they have been begging us to take some action for many, many years. It is, needless to say, inconceivable that other nations are going to take more action until the richest country in the world — the one that would be greatest amount of cumulative emissions by far — starts to clean up its act.

This issue was addressed directly in the post. The question, it seems to me, is not just whether it is “inconceivable that other nations are going to take more action until the richest country in the world — the one that would be greatest amount of cumulative emissions by far — starts to clean up its act.”, but what impact a unilateral action by the U.S. would have on the likelihood that these nations would do that. See the original post for more detail.

CAFE and Climate Change: Nada

I tried to make the point earlier today that the idea that the Waxman-Markey cap-and-trade plan can be justified by avoided harms from global warming is comically irrational from the point of view of a typical U.S. citizen.

Similarly, the White House has trumpeted the fact that the proposed changes to the CAFE mileage standards will result in “a reduction of approximately 900 million metric tons in greenhouse gas emissions.” 900 million is a big number in daily life, but it turns out, not so big when it comes to the emissions of the United States.

Keith Hennessey points to Department of Transportation analysis that projects (using the same climate model as I referenced in my Waxman-Markey post) that the impact of moving to these new mileage regulations should be that in the year 2100 temperatures should be 0.007C less than they otherwise would be, and sea levels should be 0.06 centimeters less than they otherwise would be. In other words, these standards will have no conceivably appreciable effect on global warming impacts.

I would like to say that advocates of these various restrictions on the use of imperfect sources of energy that have the small advantage of actually exiting now need to stop lazily waving to “climate change” and telling scary stories as a justification, and start engaging on the actual numbers, but this almost certainly is not true. They have the votes to do these things, for now, and the Right is politcially discredited, for now.

Waxman-Markey Cost-Benefit Analysis

There has been widespread agitation in the influential blogosphere for a cost-benefit analysis of the Waxman-Markey cap-and-trade proposal. This sure seems like a reasonable request to me, and you have to wonder why the sponsors and advocates of this bill – who are, after all, proposing an enormous commitment of resources – haven’t provided one. So I tried to do a quick version of it. I have a longer and more complete version of this coming in the next National Review, but wanted to get the bones of the analysis out for discussion as rapidly as possible.

Background Analysis

According to the authoritative U.N. Intergovernmental Panel on Climate Change (IPCC), under a reasonable set of assumptions for global economic and population growth, the world should expect (Table SPM.3) to warm by about 2.8°C over the next century. Also according to the IPCC (page 17), a global increase in temperature of 4°C should cause the world to lose about 3 percent of its economic output. So if we do not take measures to ameliorate global warming, the world should expect to be about 3 percent poorer sometime in the 22nd century than it otherwise would be. This is very far from the rhetoric of global destruction. Because of its geographical position and mix of economic activities, the United States is expected (Table 3) to experience no net material economic costs from such warming through the end of this century, and to begin experiencing net costs only thereafter.

A government program to force emissions reductions to avoid some of these potential future losses would impose a cost of its own: the loss in consumption we would experience if we used less energy, substituted higher-cost sources of energy for fossil fuels, and paid for projects—which are termed “offsets”—to ameliorate the effect of emissions (an example would be planting lots of trees). It’s complicated to estimate the cost of an emissions-reduction program, but the leading economists in this area generally agree that it would be large, and that we should simply let most emissions happen, because it would be more expensive to avoid them than to accept the damage they would cause. This makes sense, if you consider that most such plans (for example, Waxman-Markey) call for eliminating something like 80 percent of carbon dioxide emissions within the next 40 years or so. Even if the economy becomes more efficient over this period, such a quick transition away from our primary fossil-fuel sources will be expensive.

If a) the total potential benefit of emissions abatement is about 3 percent of economic output more than 100 years from now, b) we can avoid only some of this damage, and c) it’s expensive to prevent those emissions that we can prevent, the net benefit of emissions reduction will likely be a very small fraction of total economic output. William Nordhaus, who heads the widely respected environmental-economics-modeling group at Yale, estimates (page 84) the total expected net benefit of an optimally designed, implemented, and enforced global program to be equal to the present value of about 0.2 percent of future global economic consumption. In the real world of domestic politics and geostrategic competition, it is not realistic to expect that we would ever have an optimally designed, implemented, and enforced global system, and the side deals made to put in place even an imperfect system would likely have costs that would dwarf 0.2 percent of global economic consumption. The expected benefits of emissions mitigation do not cover its expected costs. This is the root reason that proposals to mitigate emissions have such a hard time justifying themselves economically. (If interested, you can read much more about this here).

Read the full article

Emissions Offsets

I reveal my inner Dr. Evil here

Carbon Tax Fantasies

Two Republican lawmakers have apparently introduced a “revenue neutral” carbon tax bill. In practical terms, Reps. Inglis and Flake’s basic idea is to increase carbon taxes, and then reduce payroll taxes by the exact same amount.

Flake says that “The first axiom of economics is if you want less of something, you tax it.” Well, lots of very smart economists believe that, but I don’t know that I’d call it an axiom. A tax on something we want less of is usually called a Pigovian tax in honor of the famous economist Arthur Cecil Pigou who proposed the idea. Ronald Coase’s lecture upon receiving the Nobel Prize in economics is a very instructive counter-argument. When discussing one of the two papers for which he won the award, The Problem of Social Cost, he had this to say:

I was exposing the weaknesses of Pigou’s analysis of the divergence between private and social products, an analysis generally accepted by economists, and that was all. … Pigou’s conclusion and that of most economists using standard economic theory was, and perhaps still is, that some kind of government action (usually the imposition of taxes) was required to restrain those whose actions had harmful effects on others, often termed negative externalities. What I showed in that article, as I thought, was that in a regime of zero transaction costs, an assumption of standard economic theory, negotiations between the parties would lead to those arrangements being made which would maximise wealth…

A revenue-neutral carbon tax is superficially appealing. It sounds like something as close to a free lunch as we offered in this fallen world. But like most free lunches, it turns out to be expensive.

The most important point is that revenue neutrality is most likely a mirage. We would have to maintain the carbon tax for decades in order to generate the consumption reductions that advocates argue will occur, but FICA rates aren’t static over decades. In 1950 the FICA rate was 1.5%; by 1970 it was 4.8%; by 1990 it had risen to its current rate of 7.65%. It has been stable for about two decades, but meanwhile the programs that it (in theory) funds are in crisis.

Over the next few decades, we should expect to be in bitter political fights over changing retirement ages, benefit levels, access to publicly-funded medical care, tax rates, and other measures designed to make these programs financially stable. The FICA rate will not be insulated from this process. Who could possibly say that when it has increased in irregular and unpredictable steps to, say, 15.3 percent between now and 2028 in response to various political crises, that, but for the carbon tax, it would otherwise have been 16.5 percent?

In fact, remember that FICA is theoretically a dedicated funding source for Social Security and Medicare. They are already underfunded. This proposal would massively reduce the collections that support these programs, which would serve to ratchet up exactly the pressure to increase FICA tax rates that will then serve to make this a net tax increase.

The idealized carbon tax is an almost perfect example of what Coase famously called “blackboard economics” – abstract economic theory that proceeds by ignoring a detailed knowledge of the actual economic system.

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