Hypothecation and the carbon dividend

This week's Newsroom column, now ungated, goes through the happy surprise in last week's budget: ETS revenues will be hypothecated. Well, it could be a happy surprise. It could all yet turn to custard. 

Treasury hates hypothecation: the ring-fencing of particular tax revenues to particular purposes. And they are almost always entirely correct in that. In New Zealand, petrol excise is hypothecated to the Land Transport Fund as an ersatz road user charge; now that technology has progressed, petrol excise should be abolished and petrol (and electric) vehicles flipped to the road user charging system that's been in place for diesels. 

That's a reasonable use of hypothecation: when it's the only feasible way of getting something like a user charge.

Otherwise, we descend into tin-pot accounting systems that make a mess of everything. 

They make a mess of the allocation of public funds, because at least in principle you'd want that the marginal value of a dollar spent by government goes wherever it can do the most good, regardless of where it came from. 

They also make a mess of politics. A tax on hipster's beard oil, all on its own, just sounds stupid. A government programme to help save the endangered saddleback might or might not make sense - who knows whether there are other conservation programmes that make more sense, or whether conservation programmes are the next best use of government funding in the first place. But if you tie a targeted tax on hipster's beard oil to a programme helping cute birds, well, that leads us to dangerous kinds of things that show up on US referendum initiatives. You look like a jerk for opposing them, even if they're really stupid. Like - a tax on ice cream to help orphans with cancer. Who could oppose that? They're orphans. With cancer. But it absolutely ruins the tax system. If you want to give money to orphans with cancer, do it out of general tax revenues and at least try to minimise the deadweight costs of generating whatever amount of funds the government wants to take from people. 

So it absolutely makes sense that Treasury hates hypothecation.

But it's a problem in this case.

The ETS faces a political problem, not an economic one. 

In a first best, we wouldn't be having this discussion at all. ETS revenues have a negative burden. It's a tax that abolishes a distortion rather than creating one. We like taxes like that. They're good. So in a first best the government would take ETS money, cut other taxes by a little bit (reflecting that we don't need the revenues from a more distortionary source quite as much), and increase other spending by a little bit (reflecting that the optimal provision of government services goes up by a bit when the marginal cost of funding goes down by a bit. So government would have a small bit more money, and would just put it to its next best use.

But we're not in that first best. We have a political problem. The government is behaving in ways consistent with a terror of ETS prices rising. It's resorting to all kinds of just absolutely crazy, costly, and ineffective measures to reduce gross carbon output. None of it makes any darned sense, because of how it interacts with the ETS. If you subsidize early EV uptake, you just free up credits for someone else to use. And same with banning oil and gas exploration, or banning coal-fired process heat, or anything else affecting the covered sector.

You then have a few options. 

Maybe Ministry for the Environment officials are very very thick in matters core to their core area of responsibility. Just simply grossly incompetent. 

Maybe MfE officials don't care about truth and just want to parrot what sounds nice to thick people in Cabinet. 

Maybe neither MfE nor Cabinet are thick, but voters don't get the ETS and don't trust it because they don't understand emergent outcomes and prices. 

Or, maybe, despite what seems like very strong voter support for Net Zero, voters would actually flip their lids if ETS prices went from $38ish to $75ish and blow up the system - and high ETS prices make it harder to figure out how to get agriculture into the system. And officials figure no Minister could stand the pressure of a few news specials showing poorer households having and even harder time paying for stuff. 

The real problem can't just be either of the first two. Those on their own can't do it. If it were just thick officials, Cabinet would have incentive to lean on them to get it right. And if voters understood it, they wouldn't be supporting these kinds of costly and ineffective policy measures. Ultimately voters are the constraint - and I expect it's a mix on fundamentally not appreciating how prices work through the ETS, the effects of the binding cap, and an unwillingness to actually bear higher daily real costs rather than symbolic stuff and the occasional visibly costly hair shirt demonstrating commitment. 

But if that's the real problem, then all the other problems can be floating around in there too because nothing fixes it. 

All of that makes for a political problem in maintaining the ETS as carbon prices rise. Eventually, somebody wins election by breaking the thing and reducing carbon prices. That builds fragility. And risk of it distorts investment decisions - if you think that the ETS buckles before prices hit $60, you don't make investments that only pay off it ETS prices get north of $60 and stay there. 

And that takes us out of the first best. We need the ETS so that we're hitting the net zero targets in ways that don't cost hundreds or thousands of dollars per tonne abated when there are still options on the table costing only $40 per tonne. Orders of magnitude differences in abatement costs make for first-order problems to solve. 

So what to do? Hypothecate the revenues, create a carbon dividend. Start of the year, forecast the government's ETS revenues. Send every household in the country a cheque for their share. Give the first adult in a household a 100% share, the second adult a slightly smaller share, and a slightly smaller share again for each kid. Carbon costs rise in household size but at a decreasing rate. Heating a house for two people doesn't cost twice as much as heating it for one people. If the government expects excess dividends from the power generators because Huntley's burning expensive coal and that's the marginal unit driving prices, throw the government's 51% share of those excess dividends into the pool. 

The transfer would be progressive; richer people spend more money on everything, and carbon is in everything. But if it still isn't progressive enough to make the ETS stick, boost the dividend payments for households with Community Services Cards. You can make the thing as progressive as you want that way, but there could be risk that payments to middle-income households start looking thin relative to what they're paying in carbon charges if you do too much of that. 

Run the carbon dividend correctly and even if voters don't understand anything about how the ETS works, or how prices work, they will understand getting a big cheque at the start of the year, and that the cheque is bigger when ETS prices are higher. 

"Here's your carbon dividend. Use it to start reducing your carbon footprint. The less you emit, the less you'll have to pay into the ETS. But you'll still get your dividend from those who don't reduce their footprint. Put it towards a heat pump. Save it for a deposit on an EV. Put in some insulation. Whatever makes most sense for you and your household. We, as government, simply can't know your circumstances. You do. We're paying you in advance because we know the costs you'll be facing are going up. Petrol prices could go up. Power prices too. Take the money, use it wisely. We trust you."

Being able to say that at the start of the year, and being able to point to it whenever some reporter gives the lazy "Oh, Minister, what do you have to say to poorer households facing rising power prices?" question, gets rid of political fragility in the system. 

Anyway. Carbon dividends make sense. And the sticking point had been Treasury just being stubborn about hypothecation. But the Budget hypothecated the revenues without saying what'll be done with them. I hope it's a carbon dividend. 

But Treasury could yet wind up being right - there's risk that the Minister will want those revenues as a "at his discretion" slush fund for piles of dumb stuff. It's easy to imagine the government preferring to use the money to fund Joe's heat pump, or Jane's home insulation, with application processes ensuring the recipients are worthy and ensuring that they credit the government for having given them a heat pump rather than crediting the ETS for it. None of it would reduce emissions, and none of it would work better in addressing equity and political economy concerns than running the carbon dividend, but I can see how it could be politically tempting. 

If the government is serious about getting to net zero, it needs a way of entrenching support for the ETS. Watch what they do with the ETS revenues. It will tell you whether they're serious about it. 

Ruling out doing anything about 99.83% of the world's emissions

My column in the Fairfax papers today argues that the Zero Carbon Bill shouldn't rule out New Zealand pursuing opportunities to mitigate greenhouse gas emissions abroad. 

The Zero Carbon Bill requires the government to focus on domestic mitigation opportunities. But the rest of the world provides 99.83% of the world's emissions. Does it seem likely that all of the very best opportunities for mitigating emissions will be found here at home? We risk ruling out doing far more good than we otherwise could.

A snippet:

I don't know if anyone ever really believed manufacturing televisions in New Zealand made sense.

Controls in place until New Zealand's reforms prohibited importing fully assembled televisions, to encourage manufacture and assembly in New Zealand. But it resulted in nonsense practises guaranteed to make televisions more expensive.

New Zealand businessman Alan Gibbs famously found it profitable to have Japanese television manufacturer JVC disassemble televisions and ship the parts to New Zealand for reassembly.

If what you cared about most in the world was making sure that Kiwi families could afford televisions, banning or severely restricting trade was hardly the right solution.

So why does the Government's proposed Zero Carbon bill, meant to address the biggest environmental challenge of our time, shackle New Zealand into only pursuing those carbon emission reductions achievable here at home?

...

The Bill requires that New Zealand's emissions budgets be met, "as far as possible", through domestic measures.

There is obviously a lot more that can be done domestically to help reduce greenhouse gas emissions. New Zealand's Emissions Trading Scheme can, should, and likely will be strengthened. The ETS should be comprehensive across all sectors. As carbon prices increase, households and businesses will adjust in the same way that they do with any other change in relative prices.

But as carbon budgets become tighter, domestic low-hanging emission-reduction fruit start being eaten up. Each subsequent tonne of emission reductions becomes more expensive than the one that came before it.

And while spending massive amounts per tonne abated can be worthwhile if it is the only and best way of avoiding catastrophic climate change, it makes far less sense if there are cheaper opportunities out there to reduce emissions.

Does it make sense for New Zealanders, collectively, to invest a lot of costly effort in the next million tonnes of emission reductions in New Zealand if, for the same kind of commitment, we could back projects abroad that did twice as much good, or 10 times as much good?

I'll now be appearing fortnightly in the Fairfax papers, so keep an eye out for me there.

Electric trains

In 2016, Kiwirail decided shift to an all-diesel fleet. At the time, it made some pretty compelling arguments for the change:

• Running an electric bit in the middle of a diesel network meant shifting everything from one set of engines to another set of engines;
• Running two sets of maintenance yards is expensive;
• Shifting to an all-electric North Island system would cost at least a billion dollars for the trunk lines and would still need diesels on the feeder lines that didn't have the electric infrastructure, so you'd still have all of the engine-switching problems. And the Wellington power system is different from the Auckland system in ways that matter for setting this stuff up;
• The overall costing of diesel engines over the operational life was 20-30% lower than the cost of electric engines;
• Rail emissions are only 1% of all transport emissions, and transport is 17% of overall emissions. 
• So - things that make rail less attractive as compared to trucks can wind up doing more harm than good (my point rather than theirs)

This week, Labour decided that Kiwirail should keep its electric railway-within-a-railway, keep switching engines mid-course, and refurbish its old electric engines. Because climate change. A Massey prof said they should have gone further and electrified the whole system. 

All of this seems insane. If we care about climate change, as we should, the best way of dealing with it is by working through the ETS. If the costs of diesel went up because the carbon charge in the diesel went up enough, maybe switching to an all-electric fleet would make sense. But if it didn't, then the government playing at political football with a State-Owned Enterprise means we're paying over-the-odds in mitigating carbon emissions. 

Does it really seem likely that the government can do the most good in mitigating emissions by pouring this kind of cash into the electrification of the rail system rather than by buying up NZU on the ETS and retiring the credits?

Update: A reader runs a few back-of-the-envelope numbers on this, copied below. It gives a rough measure of the costs of abating carbon emissions by electrifying rail. Add some appropriate confidence intervals around it, but it's at least an order of magnitude more expensive than current carbon prices - you could abate emissions by about ten times as much by putting comparable resource into buying and retiring NZU in the ETS.

Here goes.

NZ Gross emissions: 78,700,000
Transport share of gross: 17.3%
Rail share of transport: 1%

Rail emissions then on the order of 136,151 tonne per annum.

Cost of diesel conversion: $1 billion, minimum
At 6% discount rate, annualised cost: $60,000,000
Cost per tonne emission reduction: $518/tonne.

(assumes 15% fossil fuel based electricity generation, but also assumes complete rail carbon abatement but for that 15% - which won't happen because the feeder lines still have to be diesel). 

Afternoon roundup

Posting has been light as other deadlines press. But I have accumulated too many browser tabs. Here are some worthies:

• Colby Cosh on the case for using prices to reduce carbon emissions. 

  Is there really absolutely nothing you can do, even if you’re quite lower-middle-class, to create energy savings in your life? You never go to the fried chicken place across town instead of the one on the next block? Are you sure you need to own a pickup for one home reno project or a bit of landscaping every three years? Have you even looked into smart thermostats or checked your window seals? Invested in a Snuggie? Taken the old incandescent Christmas lights off the hot tub?
  
  The real problem is that you can’t ask these questions — even hypothetically, or even just to point out that every single household might ask hundreds of them — without sounding like an obnoxious schoolmaster. A carbon tax is social engineering — it is just an optimum, consciously designed, maximally market-friendly way of going about it. Any economist will add the implied caveat that all taxes are social engineering, and other taxes are engineering society in dumb or bad ways. A “carbon tax” is meant, for better or worse, to discourage the emission of free carbon. “Income tax,” which discourages honest work, starts to look pretty ridiculous when you follow the logic just a few inches further. But those are always the hardest inches to cross in the face of a policy novelty.



• Pattrick Smellie reminds us how New Zealand's ban on Taranaki oil exploration can wind up increasing emissions globally:

  The oil and gas ban is proving to be a two-edged sword politically, particularly since no matter how often Woods denies it, the evidence is strong that the ban is more likely to increase than decrease global emissions of greenhouse gases.
  
  Especially questionable has been her claim that the vast quantities of methanol currently made from natural gas in New Zealand won't end up being produced in China, using higher-emitting coal because of China's emissions trading scheme.
  
  As climate change policy expert Christina Hood told the Environmental Defence Society's recent business and climate change conference in Auckland, the Chinese ETS is not really an ETS yet and currently only applies to the electricity sector.

  Our submission on the ban is here.


• Former NZ Ambassador to Beijing John McKinnon's speech on New Zealand's relationship with China is excellent. Recommended reading.

  China is also now, what is was only potentially in 1972, a great power. The fabric of international society is woven by the ability of the international rule of law to constrain the interests of large powers such as China. This means that New Zealand, as a country which invests in and benefits from the international rule of law, has expectations of China, as it does of other great powers. That they will comport themselves appropriately, especially towards those who have less power than themselves. That is the true mark of greatness. It is pleasing to see how China has responded to these expectations, such as through its policies on climate change, and its championing of the multilateral trading system. New Zealand, along with many other countries, will be represented at China’s international import expo, to be held in Shanghai in November, and marking the 40th anniversary of reform and opening up. There are many areas where New Zealand welcomes China’s voice and can and does work with it in international forums.



• Susan St John is entirely correct about the need to better sort out residence issues with NZ Superannuation. The government is currently considering legislation that would require people to be resident longer in New Zealand to have access to the New Zealand Superannuation scheme. St John reminds us that we also need better treatment of the private retirement plans of those who bring their 401(k) with them to New Zealand.


• New Zealand's copyright industry is trying on a push for extending the duration of copyright and messing with our current ISP notification regime for infringement; I don't wish them luck.


• Net migration has slowed. This shouldn't be surprising. Migrants are only somewhat sticky; a lot of them leave a few years after arriving. That means that net migration figures will always look stronger than they should during upswings in inbound numbers, and weaker than they should during downturns in inbound numbers. Current year net migration is a function of current year inflows and lagged departures from prior year inflows. Net migration was always going to flatten off unless inbound figures continued to grow. As soon as inbound figures level off, then the outflows from prior year waves catch up. I'd be surprised if the anti-migrant tone of the last election campaign, combined with increased restrictions on those here without a residence visa (can't buy a house), hadn't amplified this.


• Some folks are complaining that Christchurch might have 'too many' houses now. What a terrible problem to have! We should be thanking Selwyn and Waimakiriri for allowing growth and solving Christchurch's post-quake housing crisis. And for those who don't like the sprawling suburbs - perhaps the Crown could consider selling off some of its downtown land holdings using a descending bid auction to find out what the value of that land really is. It's felt like unwillingness to realise losses against inflated downtown land values has been a hold-up there, but I'm not close enough to it to really know.

A climate bet - any takers?

So these stickers have been going up around Wellington.

Much of Wellington is built on land that rose up out of the harbour in the 19th century during one of Wellington's charming earthquakes. A climate change advocacy group's been putting up the stickers.

I hate climate scaremongering. It too easily leads people to dismiss both the sensible and the crazy versions of the argument.

And as I view bets to be a tax on bullshit, I'm happy to offer 10:1 odds against the 2040 shoreline being at any of the current 1840 shoreline markers. I offer the bet on Caplan's terms. Here's Caplan's terms on a recent bet against a European war:

You pay me $x today.  If any European country that was not Communist in 1988 has a civil war leading to 10,000 or more fatalities between today and December 31, 2045, I will immediately pay you $7x.  Germany counts, Turkey doesn't.  Any front page story in The New York Times, Washington Post, or Wall St. Journal stating that a literal civil war in one of the specified nations has led to 10,000 or more fatalities in that nation ends the bet in my opponents' favor.  If I die before the bet resolves, the bet ends and my heirs keep the money.
I am willing to accept up to $500 on this wager, committing me to pay up to $3500 if I lose.  Per my current rules, I will bet anyone willing to pre-pay me via Paypal.  If there is any doubt about my reliability, note that (a) I frequently bet, and have never been accused of non-payment, (b) I am a public figure with reputation to lose, (c) I have a stable address, having been a GMU professor for 18 years, (d) I am 44 years old, so am quite likely to survive until 2045.  Multiple betting partners have accepted such terms in the past.  
You may accept these terms in the comments or via email.  The bet officially begins when I receive payment.

I'm offering 10:1 against the 2040 shoreline being at the 1840 position due to climate change. The bet is cancelled in the event of a major Wellington earthquake that changes the shoreline position substantially. I'm happy to take liability of up to $15,000 on this one, in total across all those betting against me.

I'm 39 years old and so likely to be alive in 2040. I've never been accused of non-payment of a bet, but I haven't bet nearly as often as Bryan. I am a public figure with reputation to lose, though less than Bryan's. My address is less stable than Bryan's but I'm exceptionally easy to find. 

Like Bryan, I'm happy to bet with any public figures on their honour, or with anyone willing to pre-pay me. 

It's a sucker's bet - you shouldn't take it. But I particularly encourage those active in the 2040 Sea Level Wellington Community to consider taking my bet - if they believe their stickers. 

Picture HT: Nathan Ross

Catastrophes are complicated

There are lots of potential catastrophes out there, each of which might be worth spending something to avoid. So how should we decide things in a world of multiple catastrophic scenarios? Martin and Pindyck show that things get messy quickly. [ungated]

You can't run a catastrophe-by-catastrophe cost-benefit assessment and just work your way down the list: as each has a big potential effect on current consumption (through taxes to provide mitigation) or on future consumption (if the catastrophe happens, or cumulative effects of the mitigation works), which catastrophes you want to avoid has to be decided simultaneously across all projects.

Here's perhaps an easier way to think about it. Your expensive home renovation works might pass cost-benefit for you. Upgrading the car might also pass cost-benefit. But if you do the renovations, the car upgrade will no longer make sense because you won't be able to afford to eat, and the same if you do the car upgrade before the renovations. So you need to look at them both at the same time. Worse, if part of the home renovations is to keep the garage roof from wrecking the car, then the car upgrade is pointless if you don't do the renovations.

How things map out then depends on both your time preference rate and on your risk aversion. Here's the results of some simulations over seven potential catastrophes, with their rough modelling of the effects.

With low values for time preference and for the risk aversion parameter, it makes sense to pay to avoid a pile of potential catastrophes. As those change, so too does optimal mitigation.

I note that they left out the catastrophe that worries me: asteroid impact. 

Sheep guts

Exciting new developments over in the Ag Sciences area: new compounds to cut livestock methane emissions.

This week researchers at the New Zealand Agricultural Greenhouse Gas Mitigation Conference announced that they had identified several promising compounds which could cut livestock emissions. The compounds inhibit the activity of methane-producing bacteria that live in the gut of sheep and cows.

Speaking to Radio New Zealand, Agresearch Principal Scientist Dr Peter Janssen said the results so far show impressive reductions in two-day trials in sheep.

“These initial steps are relatively short-term trials in sheep and they show that you get a reduction of methane between 30 to 90 per cent,” he said. “It’s a very exciting result but there’s still a lot of checking to be done before you actually get something that a farmer can use safely.”

Now if this pans out, the New Zealand government should consider releasing the technology for everybody in the world to use, as New Zealand's substantive contribution to the fight against greenhouse gasses.

If high-end methane reductions maintain, New Zealand on net very likely will have done far more good in reducing agricultural methane than it could have done with a $30/tonne carbon charge.

I'd written:

If everyone in the world were doing carbon trading or carbon taxes, we'd want to as well. But, realistically, if New Zealand were to disappear into outer space tomorrow, it's pretty unclear that the entire abolition of New Zealand's net greenhouse gas emissions would do much on aggregate warming outcomes. Maybe we'd delay the onset of any particular level of GHG accumulation by a half day over a century. In that case, New Zealand could perhaps do better by picking high variance plays despite their lower expected mean. Pour money into biotech research for low GHG pastoral systems and give the resulting technology away to anybody who wants to use it. Lower expected returns, but if it pans out, it could reduce GHG emissions by a heck of a lot more than NZ could achieve on its own via domestic incremental reductions in carbon or methane emissions.

Some lotto investments are worthwhile.

Flood risk

Christchurch Council's starting to worry about sea level rises and global warming. As much of the land on the east side of town sank with the earthquake, these risks are a bit bigger than they'd previously been.

There's been a bit of speculation about how this will affect zoning in future, with some recommendations of higher minimum floor heights above sea level. Here's the Tonkin and Taylor report; Cresswell has a skeptical take.

Wouldn't it make more sense simply to have EQC set risk adjusted insurance premiums? Zoning changes mandating higher floor levels only really apply on new builds or, potentially, on substantial-enough building redevelopments. While new buildings will then get the higher floor levels, some older ones will have replacement or refurbishment delayed because the relative cost of a new building's gone up. If EQC set actuarially fair rates for their disaster insurance, the distortion would be gone. We'd also then avoid all of the fights and rent-seeking that will result when Council starts deciding where people will be allowed to build in future due to flood risk, arguments about how seriously we should take the upper-limit projections on sea level changes, and the like. Let the insurers set the premiums, then let individuals sort out whether they like current beachside property. And let EQC's premiums basically reflect the incremental effects of insuring different types of properties on EQC's reinsurance costs. If Swiss Re won't provide reinsurance for my house except at additional charge, I should be paying the costs of that. Where EQC's trying to minimise its reinsurance costs and where the international reinsurance markets are at least somewhat competitive, this knocks the political fights around global warming out of the mix.

Tim Harford comments usefully on distortions caused when government subsidises living on flood plains. EQC premiums are scaled by value at risk, but not by the likelihood of adverse events. The country varies in seismic and flood risk; buildings vary in robustness to those risks. But nobody pays more than $150 per year for their EQC cover. While you might think the distortion can't be that big as EQC only covers the first $100,000 in damage to your house, with insurers charging actuarially fair premiums taking on the bigger part, EQC also covers land remediation.

Conflicts disclosure: Our house in South Brighton, two blocks from the beach, is a couple of meters above road level. The road's a meter or two above sea level. I expect that, as we're at least a meter higher than neighbours down the road, the regulatory changes likely aren't binding on us. But I sure wouldn't be happy about any zoning designations saying that the spit south of Bridge Street needed to go back to bush and sand because of worries about sea level rises a century out.

Minimum wages and climate change

Stephen Gordon wants to construct a Venn diagram showing the proportion of people who accept the evidence on minimum wages (it's a poor way of helping the poor) and who also accept the evidence on global warming (the place does seem to be getting warmer); he expects the intersection to be disappointingly thinly populated.

I can't help him out exactly, but I can add a bit.

The 2008 New Zealand Election Survey asked whether the government should control wages and whether strong action is needed on global warming, but had no questions on the employment effects of minimum wages. It's not the best: maybe some folks want maximum wages but don't like minimum wages, and maybe some (like me) are happy to take the evidence on global warming but are less convinced we need to invest massive resources in mitigation today - I'd have been somewhere between neutral and support on that question.

Here's the raw cross-tab.

Those who accept the science on government wage controls should oppose or strongly oppose them; those who deny the science on government wage controls will be more likely to support or strongly support them.

There are 1,471 of 2,892 respondents who accept the science on wages and 542 of 2,892 who reject it. Among those accepting the science on wages, 46.6% support or strongly support government action on global warming while 27% oppose or strongly oppose it. Among those neutral or opposed to the science on wages, 60.4% support or strongly support government action on warming while 15.2% oppose or strongly oppose it. These hit the 7+ t-stats. So disagreeing with the science on wages seems to predict stronger support of climate policy.

Among those supporting or strongly supporting strong government action on global warming, 45.8% accept the science on wages and 22.9% reject it. Among those neutral or opposed to strong action on climate, 59.7% accept the science on wages while 12.9% deny it. The t-stats on these across groups are higher than 7.

So if those supporting government action on climate are more likely to have supported the science, those supporting climate science seem significantly less likely to accept the science on wages and significantly more likely to reject the science on wages. And supporting the science on wage controls correlates with lower support for government action on climate and stronger opposition to it.

It's not a pure test because it's not anti-science to say that the scientists are right about mean expected warming over the next century but still to oppose "strong action" because you don't think it passes cost-benefit analysis. But you'd expect that there'd at least be a positive correlation between accepting the science and wanting action - it would seem odd to want action on climate change while thinking there's no warming.

The survey also has a measure of self-reported ideology: 0 left, 9 right, 5.4 mean. Another fun fact: dropping all the "don't know" respondents, mean self-reported ideology is 5.5 among those accepting wage science and 5.2 for everyone else; mean reported ideology among those wanting strong action on climate change is 4.8 and 6 for everyone else. The t-stat on group differences in ideology on climate is 11.9; on wages, 3.6. So the ideological divide on climate policy seems greater than that on wage controls.

I'd previously put together a couple of factor scores pulling together responses on social questions to get a measure of social liberalism and one on economic questions to get a measure on economic liberalism. I'd left the climate action question out of both factor analyses because supporting "action" on climate is neither pro- nor anti-market.* So I have a mean zero, SD 1 measure on social liberalism (higher is more liberal) and on economic liberalism (higher is more liberal).

A couple quick and dirty specifications have social liberalism strongly predicting support for climate policy, economic liberalism strongly predicting opposition to climate policy, household income not affecting preferences, and education predicting increased support for climate policy. In the ordered logit specification, a standard deviation increase in social liberalism predicts a 0.41 standard deviation increase in support for climate policy; a standard deviation increase in economic liberalism predicts a 0.6 standard deviation decrease in support for climate policy; a standard deviation increase in education predicts a 0.17 standard deviation increase in support for climate policy. There aren't any other measures in there that could capture generalised attitudes towards science, alas.

There are plenty of reasons why economic liberals could come out less in favour of strong action on climate change. A few candidates, some better than others:

1. Accept the science, but reckon future mitigation is more likely to pass cost-benefit, or that other projects are more worthwhile (a la Lomborg). Or, in stronger form, accept the science, be sceptical about the prospects for policy to fix things, and recognise that a warmer world could well be a better world up through, say, three degrees of warming. David Friedman makes the best argument along these lines** (his earlier blog post here). I don't think anybody who grew up in Manitoba can deny that there are some positive effects from a gradual warming.
2. Accept the science, see a need for policy, but reckon that the "strong action" mentioned in the question means something more than the standard economic advice of a revenue-neutral carbon tax that can ramp up over time.
3. Accept/agnostic on the science, but see that most of the folks shouting loudest for climate action are a bit nuts on other economic issues and be hanged if you'd ally with them - heck, some seem to think that reduced economic growth is a feature rather than a bug of some climate policies. And the same bunch that shouts about global warming also reckoned that peak oil was a serious concern - which was utterly insane given that, if peak oil had been right, it would have been a part of the solution to warming! As David Friedman put it: even if there were zero evidence of global warming, many of the proponents of anti-warming policies would still support those policies, but on other grounds. 
4. Reject the science: the loudest proponents are completely wrong on the economic issues you know something about, and really seem to have worked backwards from "policies I support" to "the data must have said X" in assessing things on those margins, so you can't reject that they've done the same here. Note that this is stronger than the explanation immediately prior: it says that the scientists are part of some kind of conspiracy.
5. Reject the science: macroeconomic models are a bit nuts, and climate change models have all the nuttiness of some of the big macro models but with even more uncertainty about cloud feedback loops. If economists can barely get a consensus on the government spending multiplier, how can we trust coefficients on climate sensitivity? And if sensitivity were scary bad, how did the planet ever manage not to turn into Venus a few million years ago? Sure, the models look ok over the period of calibration, but their out-of-sample predictions of warming in the 2000s weren't all that great. Until the models can figure out why warming leveled off in the 2000s, should we really trust what they say about 2150? 
6. Pure mood/expressive affiliation, or that in combination with that pretty much every other prediction of global doom has been rather wrong.

I'm personally somewhere between 1 & 2: a low carbon tax capable of being ramped up over time could slow the pace of warming, giving more time for adaptation, and helping to guard against the scarier warming scenarios.***  I suspect that some of the opposition to climate science among those who are not climate scientists and who are not in a position to personally evaluate the quality of the literature comes from 4 & 6.

There's a reasonable contingent of pro-market people**** who are happy to take the science on climate and figure a revenue-neutral carbon tax isn't all that bad. Would that more of the pro-climate-policy crowd would come over to the intersection of Stephen Gordon's Venn diagram. It's mildly frustrating that the New Zealand Green Party excoriates those opposed to rather strong action on global warming as anti-science while rejecting the consensus views of economists on economic policy.

* Club Pigou is pro-market; Club ban-everything-that-emits isn't. Note that the appropriate domain of Club Pigou ought to be bounded.

** The first half-hour of the linked Friedman video provides a wonderful exposition of how economists think about externality and policy; strongly recommended.

*** I take David Friedman's point on that the Nordhaus / Weitzman insurance argument for climate policy is flawed where it considers fat tail risks of doing nothing while ignoring fat tail risks of doing something. But if the main potential low-probability high-cost risk of emitting too little is another ice age, it seems easier to ramp up CO2 emissions if things look like they're heading that way than it would be to remove CO2 that's already been emitted.

**** Did I mention Club Pigou?

Don't start by assuming stupidity

Suppose that you want to reduce petrol usage because of global warming.

If you begin from an assumption of consumer rationality, you'll prefer a carbon tax or some form of emission trading. Announce today a schedule of Pigovean carbon taxes and how they will affect petrol prices as they ramp up over time. Then let customers decide how to re-optimise when buying cars. We'd expect an increase in demand for cars with better fuel economy. Cars with worse fuel economy will start having to sell at a discount. Manufacturers adjust their product mix to account for changing demand and aggregate fleet composition changes over the longer term.

If you start from an assumption of consumer stupidity, you'll prefer regulations targeting car manufacturers mandating fuel economy standards. If car buyers are myopic and stupid, they'll fail to account for the higher lifetime cost of a car with worse fuel economy. Because customers are stupid in this way, manufacturers will not adjust their product mix to shift towards cars with better fuel economy - there's no change in demand for more efficient cars even with a well-publicised schedule of future tax increases. And so direct regulation has to be used. There are problems with this and lots of them - all the gaming of US CAFE standards and redefinitions of what constitutes a truck as most obvious example. But it could be a second best if car buyers are really stupid. Or, if they're just really really short-sighted. We'll also have to assume that car buyers do not change their behaviour by a lot when the price of driving a kilometer goes down by a lot.

What happens if we look to the data? Busse et al in the latest American Economic Review find pretty good evidence that car buyers' demand for fuel economy is sensitive to petrol prices. They conclude (ungated versions):

We estimated that a $1 increase in the price of gasoline increases the market share of cars in the highest fuel economy quartile by 21.1 percent and decreases the market share of cars in the lowest fuel economy quartile by 27.1 percent. We also estimated the effect of a $1 increase in gasoline prices on unit sales of new cars and found that sales in the highest fuel economy quartile increased by 10–12 percent, while sales in the lowest fuel economy quartile fell by 27–28 percent. We estimated the effect of gasoline prices on the equilibrium prices of new cars and found that a $1 increase in the price of gasoline is associated with an increase of $354 in the average price of the highest fuel economy quartile of cars relative to that of the lowest fuel economy quartile. For used cars, the estimated relative price difference is $1,945.

We used these estimates to investigate whether the changes in equilibrium prices for new and used cars associated with changes in gasoline prices show evidence that consumers undervalue future gasoline costs of cars with different fuel economies relative to the prices of those cars. This could be thought of as a necessary condition for effective policy: the more car buyers discount future fuel costs, the less effective a gasoline tax or carbon tax will be in influencing vehicle choice. Using several different assumptions about vehicle miles traveled, a range of assumptions about the elasticity of demand, and comparing the relative price differences between different quartiles, we find little evidence of consumer myopia. Many of our implicit discount rates are near zero; most are less than 20 percent.

So the "people aren't stupid and weigh costs over time in a sensible fashion" model seems the better baseline approach.

Now imagine that you set a fuel economy standard instead of a carbon/petrol tax in a world where customers are forward-looking and not idiots. Well, once they've bought the more efficient car, the value they derive from burning another litre of petrol increases substantially: they can drive farther, and they're not charged any more for that litre of petrol. And so a lot of the reductions in carbon emission you might have expected get whittled away by that people drive more. If you'd done it instead with a petrol tax, the marginal cost of another litre of petrol is higher. People still flip to the more efficient vehicle, but petrol usage doesn't rebound as much as consequence because the marginal cost of a litre is higher.

Good graphs are general, or how a carbon tax is like drug legalisation

Stephen Gordon ably makes the case for market mechanisms over regulatory approaches to dealing with climate change. The deadweight costs of achieving any arbitrary level of greenhouse gas reduction are lower either under emissions trading or a carbon tax as compared to using regulations like "You must use Technology X" or "You may not use Technology Y.".*

Stephen illustrates with a couple of handy graphs. They're also graphs that I use in my Economics and Current Policy Issues class, but in an entirely different context.

Here's the welfare effect of a regulatory approach. Stephen writes:

Regulations essentially have the same effect of a technical setback: they oblige suppliers to undertake practices that increase the cost of production. This has the effect of shifting the supply curve up: Faced with higher costs, producers are going to raise the minimum price they’ll accept for any given quantity produced. This upward shift increases prices and reduces quantities produced, which is of course the policy goal. It also affects the producer and consumer surplus:

He then explains why the welfare loss is the entire green trapezoid, before illustrating the alternative approach:

Suppose now that instead of regulations, the government imposes a tax on the sale of the good. This also shifts up the supply curve, as producers will now require prices that offset the extra cost of the tax. The difference here is that government revenues are now introduced into the graph:

A good chunk of what was deadweight cost is now crunchy tasty tax revenue.

I use exactly the same graphs to illustrate the superiority of tax based approaches over drug prohibition in my Economics and Current Policy Issues course at Canterbury. Prohibition is a negative technology shock for producers involving real increases in production costs. The same consumption reduction can equivalently be achieved by a legalised system that uses taxes as consumption deterrent, and with a similar transformation of deadweight cost into tax revenue. You can make it more complicated by saying that the demand curve shifts out under legalisation and by noting that there are tax levels beyond which you induce black market providers to enter the system; I take these as suggesting you can't really have a retail price under legalisation that's above the current black market price. Whether we then have any substantial consumption increase is more of an empirical question; Portugal's experience suggests it not to be the case.

* I still put reasonable weight on that this may not be the best approach for New Zealand. If everyone in the world were doing carbon trading or carbon taxes, we'd want to as well. But, realistically, if New Zealand were to disappear into outer space tomorrow, it's pretty unclear that the entire abolition of New Zealand's net greenhouse gas emissions would do much on aggregate warming outcomes. Maybe we'd delay the onset of any particular level of GHG accumulation by a half day over a century. In that case, New Zealand could perhaps do better by picking high variance plays despite their lower expected mean. Pour money into biotech research for low GHG pastoral systems and give the resulting technology away to anybody who wants to use it. Lower expected returns, but if it pans out, it could reduce GHG emissions by a heck of a lot more than NZ could achieve on its own via domestic incremental reductions in carbon or methane emissions.

Banning the bulb - the information critique

I'd noted a few problems with banning incandescent lightbulbs. First, we can't be sure that one bulb is really friendlier than another without very comprehensive information on how they're manufactured; second, where New Zealand's ETS has things roughly right, at least when it comes to power generation, it's pretty hard to make a case for banning lightbulbs.

Bryan Walker notes a couple of studies suggesting that the cheaper-to-run bulbs are also friendlier to manufacture:

However I had a look to see what I could find, and came across this assessment of CFLs from a writer initially inclined to be sceptical about them, and this report on LEDs. It doesn’t look to be an issue.

A commenter at Offsetting found this one too.

I've no particular dog in this fight; if CFLs and LEDs are friendlier to manufacture, so much the better. But I'm still not sure that it's actually knowable. For example, Bryan's first link provides this table:

Here's a summary of the embodied energy in a light bulb (all numbers represent energy in kWh):

	CFL	Incandescent	8 Incandescent bulbs
Glass	0.17	0.11	0.88
Plastic	0.68	0	0
Electronics	0.66	0	0
Brass	0.18	0.18	1.44
Operation*	120	60	480
Recycle**	1.69	0	0
Total	123.38	60.29	482.32

* This assumes the CFL bulb operates for 8000hrs and the incandescent bulb operates for 1000hrs
** This assumes that the energy required to recycle a CFL bulb is equal to its production 

Let's think about the plastics in the CFL and assume that the table has everything right about the direct energy costs of making plastic. But what about the energy costs of the machines that had to be bought to make the plastics? What about the costs of the machines that made those machines? We'd need to know everything about all the materials that go into all of the pieces of equipment that make the machines that make the machines that make plastics, and then everything involved in the materials used in making that prior set of machines, and so on all the way back.

Read Leonard Reed's I, Pencil. If a pencil's that hard to figure out, an LED bulb isn't going to be easier.

That's just the information problem on the supply side. What about heterogeneous customer demand based on their having very different uses for lightbulbs in different places? In large parts of the country in large parts of the year, waste heat from incandescent bulbs is not waste. It's just a less efficient way of partially heating your house. When I spend a dollar in power heating my house with my lightbulbs, I'm wasting about fifty cents if my heat pumps are twice as efficient as radiant heat; I'm not wasting the whole dollar. I don't want CFL bulbs in some outlets because they take just too long to wake up and provide light; in other spots in the house, it doesn't matter if it takes a couple of minutes to get useful lighting levels. A ban says there is no possible reason for a consumer to prefer an incandescent bulb that can outweigh the difference in power cost, and that just isn't true.

Walker continues:

Crampton’s second point was that an ETS which is functioning well removes the need for any regulatory interference in the market. “If power prices incorporate carbon charges via the ETS, then there’s no real economic case for pushing consumers to choose bulbs they don’t want.” He goes on to say that if the ETS isn’t producing the desired effect the answer is to improve the ETS, not make piecemeal interventions. It crossed my mind when I was writing the post that if the ETS was functioning at a level designed to drastically reduce carbon emissions there mightn’t be a need to bemoan the Government’s action on incandescents. But it is not functioning at that level, and the Government seems determined to ensure that it never will, or will only so far in the future as to be much too late.

If the ETS is broken and unfixable, then you can start making second-best cases for all kinds of stuff. But I'd thought it was least broken when it came to electricity generation.

But should New Zealand's ETS really go beyond that which everybody else is doing? "Drastically reduce" seems a pretty tough standard. Maybe it's the right one if everybody does it at the same time and agrees to be bound by it, but surely NZ going it alone in pushing for drastic reductions does a lot more to ruin the NZ economy than to delay global warming; we'd have to expect the rest of the world to be remarkably strongly swayed by New Zealand's example to expect otherwise. And that's just not going to happen so long as the mess in Europe and the looming potential economic mess in China are the headlines.

Walker continues:

Reining in carbon emissions has become a matter of high urgency, far outweighing concerns about government intervention in the economy. For that matter the ETS itself is an intervention, designed in its original intention to make markets assume the environmental costs which left to themselves they ignore. I see no reason why it should not be accompanied by other government directives which ensure that markets are not permitted to operate in areas that clearly slow the transition to a decarbonised economy.  We accept government mandates in many parts of the economy such as the compulsory insulation of new buildings and we rue failures in regulation such as allowed the emergence of leaky buildings.

Banning incandescents does not to my mind invoke the spectre of a centrally planned economy. It’s simply part of boundary setting for markets to operate within, a proper function of government and one buttressed by the urgency of the climate crisis.

The terms of the argument I think here have shifted a bit. First, my critique of lightbulb banning wasn't that it was interventionist; rather, that it was a worse regulation than having a working ETS. If the ETS were working correctly, there would be no efficiency case for banning lightbulbs; I'm not even convinced that there is a case for banning lightbulbs given the problems in our actual ETS.

I was hardly making the case that banning bulbs leads to a centrally planned economy. Rather, the knowledge requirements for assessing whether a ban is desirable and being really sure about it aren't far from the knowledge required to make central planning feasible.

If we want a shot at drastic reductions, though, we could do well to take another tack entirely. The ETS imposes some costs on the economy. Not huge ones, but they're real. Ditch the ETS and pour money into ag biotech research into improved pastoral systems for low methane; provide a free licence for anyone to use the resulting research. If it does nothing, then we've hastened global warming by maybe a day a century from now relative to NZ's having kept the ETS.* If it works, we substantially abate global agricultural methane emissions. A small country in the middle of nowhere with little influence might do better with the high variance play


* My baseline assumption here is that if New Zealand as a whole were shot into outer space tomorrow, with no further emissions of any kind, we'd at most delay whatever carbon concentration or temperature milestone we'd have otherwise achieved a century from now by at most two or three days. We're a pretty small dot.

Post Kyoto

Andrew Leach discusses the mechanics of Canada's withdrawal from Kyoto. In short, if Canada gives notice of Kyoto withdrawal before year-end, it suffers no penalties from current non-compliance. To become compliant, Canada would need to spend perhaps $19 billion on international carbon credits. But the only penalty for non-compliance relevant to Canada, even if they stay in, is a harsher target in a second period regime from which they're abstaining anyway.

Meanwhile, we're getting set to sign on for the second Kyoto period, if any deal goes forward, though Tim Groser seems less keen on any deal that doesn't include the US or major developing-country emitters.

I've noted before that NZ's excess emissions are only a cost on the public purse if we choose for them so to be; if there's no second Kyoto period, there may be no point in buying up credits for first-period non-compliance.

But there's one consideration here relevant that isn't for Canada: non-compliance also keeps us out of the international market for selling carbon credits. And that would hit forestry guys selling credits abroad. And so there could be distributional issues domestically if New Zealand were to be non-compliant.

Disclaimer, as always: I reckon buying insurance against bad case global warming worth the investment. But I'm not convinced that New Zealand's ETS is at all worthwhile unless it's part of a global agreement for emission abatement. Absent that, I still reckon we do better by making higher variance plays on technology development.

Post-Kyoto

Extending the date for various industries' entry into the New Zealand Emissions Trading System costs the public purse only to the extent that the government is required to buy carbon credits on the international market to make up for any failure to reach aggregate pollution reduction targets.

I've argued that there is only such cost if the government wishes for there to be such cost: Kyoto is not binding, and it's hard to point to other countries willing to impose very large fiscal costs on themselves to meet the targets by buying credits. Some are spending relatively small amounts of money. But nothing like the amounts that agriculture is held to be costing the country through delayed implementation.

And now we find that most folks are banking on there being no binding second stage post-Kyoto. Here's the Science Media Centre; here's a Nature commentary piece.

If there is no binding second stage, then there is no penalty for non-compliance in the first stage. Recall that the penalty for first stage non-compliance is tougher second-period targets. If the second period doesn't bind, then the first period doesn't bind. And we're, again, kinda nuts if we're going to spend measurable fractions of GDP buying international carbon credits to make up for a delayed accession of agriculture to the ETS.

I could be missing something, but here's what I'd expect this means:

• New Zealand still should be doing its best to do its part to reduce global warming. I think this is better done by biotech research into low-methane pastoral systems that's then released under free licence to anybody who wants to use it, but it's more than plausible that keeping the ETS is second-best given its existence and given lots of folks' investments having been made on expectation of its continuation. And, in the longer term when everybody's moved to ETS or tax regimes, we'd want to be there too anyway.


• New Zealand should not expect to be on the hook for big national costs if it winds up making more sense to delay any sector's accession to the system. Agriculture will fail to earn carbon credits for any reduction in emissions, but if implementation is delayed because they can't abate in the very short term, that's no real loss.

Weitzman!

Martin Weitzman is presenting here at Canterbury, tomorrow afternoon, on the economics of climate change.

I'm really looking forward to his talk; I hope to see a lot of local Offsetting readers there too. RSVP now if you haven't already!

Weitzman argues that a fat downside tail in the distribution of potential outcomes make the case for strong action to combat global warming - it's insurance that's well worth the premium.

It's a pretty reasonable argument. And, I broadly accept it: it's worth spending a bit on insurance. My general problem with it is that there are all kinds of potential fat tailed risks with deep structural uncertainty. So I have the same problem with Weitzman's argument as I have with Posner's "Catastrophe": there are a non-trivial number of potential states of the world in which all human life is extinguished. It's not immediately clear how we ought to expend resources in insuring against all of the different risks.

At the margin, I'd strongly favour transferring money from general spending to these kinds of insurance expenditures. But how much can or should we spend in total? And how to allocate across risks? I wouldn't be averse to transferring some money from global warming abatement to asteroid abatement: if NASA or somebody else discovers an asteroid that's on track to hit us in a decade, it's remarkably unclear whether there's anything we can do about it. I don't think the decade-long end-game would be particularly fun. There's also the potential emergence of all kinds of different superbugs. The risk of bad global warming outcomes in the medium term is perhaps on par with the risk of emergent superbugs, and much higher than the risk of asteroid (although the costs of asteroid approach infinity). From there we move to less and less likely events - all the way down to Shoe Event Horizons and Grand Collapsing Hrung Disasters. We need some mechanism to help us allocate resources correctly between global warming and other plausible (and, on an insurance argument, even implausible) potential disasters. And if Cost-Benefit analysis fails us when facing issues of deep structural uncertainty, on what basis ought we make decisions?

I hope to get the chance to ask Weitzman at tomorrow's lecture. And I hope to see you there.

The magic washing machine

My mother explained the magic with this machine the very, very first day. She said, "Now Hans, we have loaded the laundry; the machine will make the work. And now we can go to the library." Because this is the magic: you load the laundry, and what do you get out of the machine? You get books out of the machines, children's books. And mother got time to read for me. She loved this. I got the "ABC." This is where I started my career as a professor, when my mother had time to read for me. And she also got books for herself. She managed to study English and learn that as a foreign language. And she read so many novels, so many different novels here. And we really, we really loved this machine.

And what we said, my mother and me, "Thank you industrialization. Thank you steel mill. Thank you power station. And thank you chemical processing industry that gave us time to read books."

So says Hans Rosling in a wonderful address cautioning against anti-global warming schemes that depend on denying washing machines to the third world.

Here's hoping Thorium works!

What should we do?

I'm on tonight for the Kim Hill moderated debate over at Lincoln University

Caroline Saunders opens for the "we have to have government reorganize our economy to deal with peak stuff" side. I'm after her. Then we move to general debate. With Caroline are Bob Frame from Landcare Research and Graeme Coles. With me are Ruth Richardson and Sharon Buckland (Chevron/Caltex).

Here's what I intend on delivering as opening for my side - I'm allowed 5-10 minutes. Comments and suggestions welcome. And even more welcome would be a few attendees at tonight's event. I'm very much expecting this to be an "away" game; it would be nice to have a few from my home team there in attendance. I expect subsequent debate to hit onto peak oil (futures prices on NYMEX show no evidence of it) and post-oil (Thorium and hydrogen, says me, but that's all a half century away). I've the Hotelling model in my back pocket as well. Here's the draft text.


Wealth, resilience and the environment
Address to the Kim Hill "Hot Energy Debate"; check against delivery.

Some days, it really looks like the world is ready to collapse. Caroline Saunders just gave a reasonable description of a lot of the problems we’re facing. Increased carbon output seems likely to increase global temperatures by a degree or two by the end of the century; sea levels may rise perhaps up to half a metre as consequence. Food price increases have hurt the world’s poorest. And oil supplies may run low sometime in the next fifty years.

And now we have to decide what to do about it all.

And there’s an awful lot we do have to do. But what we have to do depends on who the “we” is.

As individuals, “we” have all already started responding to the challenge. Oil prices have risen substantially over the last fifteen years. I remember when I was a grad student back in the Washington DC suburbs. Oil was a bit under $30 per barrel and petrol cost about $0.90 per gallon. That’s about $0.33 per litre. I drove a ’69 Buick Skylark with a V-8 and a 4-barrel carburetor that got about 12 miles to the US gallon – about eighteen litres per hundred kilometers. Since then, oil prices have risen to about a hundred dollars per barrel and petrol prices here are more than $2.00 per litre. As one of the “we”, I switched to driving a 2000 Honda Stream that uses less than half as much fuel – about 8.5 litres per hundred kilometers. And it isn’t just me – the broad trends are toward more fuel efficient vehicles and away from gas guzzlers. Nobody has had to tell us to do it – it just makes sense for our pocket books and so we have. And nobody’s had to tell Japanese car dealers to send us more of their smaller cars than of their bigger trucks – importers could tell what customers wanted and sorted things out as part of the distributed “we”.

As energy prices rise, “we” have moved to actually start insulating houses in New Zealand. It’s something Kiwis have been reluctant to do – best I can figure, you folks think there’s some kind of moral sanctity in wearing the itchiest woolen sweaters close to the skin; having a cold house gives you an excuse to do that. Well, with an insulated house, you can enjoy the itchy woolen sweaters with fewer space heaters. “We” have been switching to more energy efficient appliances. And “we”, as producers, have started building those more energy efficient appliances.

So the “we” as consumers have been responding to what prices are telling us about the world. Energy has become scarcer, as we can see by the price rises, and so “we” have responded by using less of it. And “we” as producers and entrepreneurs have responded by meeting that demand: coming up with new and better designs for vehicles. The new Boeing 787 Dreamliner uses 20% less fuel than the similarly-sized Boeing 767. And recent designs of double-D framed aircraft – nowhere near production as yet, but we could be there in twenty years – suggest fuel savings of around seventy percent. “We” as entrepreneurial designers and as corporations looking to reduce costs will make these designs a reality as fuel prices rise further.

All of these are things that “we” will do entirely of our own initiative and without any need for grand “master plans”. They’re the kinds of things “we” are doing already and will continue doing, simply by watching price signals.

Let’s think of the next bigger “we” – we as communities, towns, and cities that have to make some collective decisions. Much development from the mid twentieth century onwards was predicated on the idea that people wanted big suburban sections of land with low density use. And so “we” as communities put in place land use regulations preventing densification. Because land use couldn’t become more dense, cities built out. And as city planners got upset about seeing urban sprawl, they started putting in place green belts and metropolitan urban limits.

The combination of density restrictions and urban limits worked to massively inflate land prices and really kill a lot of poorer folks’ dreams of owning their own home. But it did well for suburban middle class folks who could afford a home and who wanted to keep the poor folks out of their neighbourhoods. If petrol prices are likely to rise substantially, “we” as communities are probably going to have to rethink our zoning density regulations.

I know a lot of people are really really keen on public transport solutions ranging from buses to light rail. But while “we” as voters and pontificators seem to like those ideas, “we” as commuters don’t. Except for really high population centres like New York, Boston and Washington DC, light rail and subways are overwhelmingly money sinks – people won’t use them unless they’re heavily subsidized. Why? Because they’re really inconvenient. They’re great for the single guy commuting from his house to his office. But for families who are making multi-point commutes – dropping the kids off at school, going to work, grabbing some groceries, getting the kids then going home – they’re impossible. And so they’re underutilized.

What can “we” do then, as communities, that meshes well with what “we” as individuals want to do? Change zoning to allow greater density and more mixed use. You don’t have to force anybody to do anything. Allow the development, and as people want it as prices move, entrepreneurs will provide it. The more commercial activity is allowed near residences, the more able people are to live near work. Denser housing provides an incentive for grocery stores to come in close to where people live, making for shorter trips to the store. And, this kind of dense, mixed use environment is precisely the kind of community that Jane Jacobs lauded as the most vibrant and liveable kind of place to be. More recently, economist Ed Glaeser has written a lot about how dense urban environments are not only some of the world’s most creative and innovative places – our engines of economic growth – but are also some of our most environmentally friendly places. Residents of downtown New York use far less energy than folks in the suburbs; it costs a lot less to heat an apartment than a suburban house, and folks in dense urban environments don’t need to drive as much.

Our zoning regulations have prevented it, and “we” as activists have worked to kill it by lobbying against rezoning of land in places like the New Brighton pier where densification could have shortened commutes, built communities, and provided additional hubs outside of the CBD that would have given us greater resilience in the face of natural catastrophes like the recent earthquake. The more of these hubs we allow to emerge by easing up on zoning, the more resilient we will be to a wide variety of challenges that might come.

The next bigger “we” is New Zealand as a country. What can “we” do there? The best we can do is to avoid screwing everything up. The further decisions are away from folks on the ground, the more likely everything is to turn pear shaped.

And boy are “we” good at making those kinds of disasters when “we” start acting through national policy. Through the 1990s in the States, folks really worried about the environment, peak oil, and global warming pushed really hard for policies mandating ethanol use in blended gasolines and big subsidies to ethanol production. The result has been the big spike in food prices that Caroline just showed us. Even Al Gore, the Senator who pushed hardest for those policies, has admitted they were a colossal mistake. “We” really need to guard against the damage that “we” can do when we all act together towards something that sounds good.

Caroline put up a slide showing the big increase in atmospheric CO2 concentrations over the last while. Imagine for a moment that a massive earthquake hit tomorrow that submerged New Zealand a mile below the sea, never to return. Now imagine the graph showing CO2 emissions for the next century. Would that graph be any different with the complete elimination of New Zealand as a country. No. The best you could hope for is that global CO2 concentrations might take a day or two longer to reach a given level a century hence. When you think about it that way, it helps to put into perspective what “we” as a country can do to slow global warming.

Now I know somebody’s going to come back at me and say we all have to do our part and that we can be a shining example unto others and the rest of the world will follow our lead. But that’s magical thinking. It’s just not going to happen. Instead, I argue that what “we” should be doing is looking at ways that we can help the rest of the world to reduce total emissions through technological change in areas where New Zealand already has a research advantage. We’re not likely to come up with the next innovative design for fuel saving aircraft. China is miles ahead of us in coming up with the next best source of power generation – Thorium fueled nuclear generators that produce next to no waste and cannot melt down because their reaction is fuelled by a photon beam that, if turned off, stops the reaction. Once China has built those, “we” might do well to allow a few reactors if they’re commercially viable and safe.

But what can “we” do that would have global benefit? Fund agricultural research into crops and livestock that produce less methane. We’ve already made a great start. The most we can hope for with our emission trading scheme is that our emissions reduce to zero – and that won’t make any difference in the grand scheme of things. But if we could take the resources that we’ve devoted to the emissions trading scheme and instead use them to fuel development of new agricultural technologies, and then give those technologies for free to anybody in the world who could use them – that could make a difference on a global scale. That’s where we should be looking if we want to make a real difference rather than just feel good about ourselves for making minor reductions in GHG emissions with a trading scheme. When a Canterbury guy tells you that the best we can do is give more money to Lincoln, you probably should listen.

Finally, “we” as a country can work hard to pursue policies that allow us to become wealthy. Global warming and “peak” whatever are not the only problems that can emerge. We’ve figured that out pretty well in the last six months or so. Whatever challenges emerge, the richer we are and the stronger economic base we have, the better placed we are to deal with whatever might come. If sea levels rise by more than we expect, we can build seawalls and move people to higher ground if we’re richer; we can’t if we decide that growth is a bad thing. We don’t know what challenges might come. But we’ll do better facing them if “we” don’t decide to hobble economic growth.

Technology first

Get the technology sorted first.

The iron law tells us that the basic math of global emissions will only become more unforgiving. As countries like China and India develop, they will demand ever-greater supplies of cheap energy. Global energy use will likely double or triple over the next 50 years, even if we use energy much more efficiently. If developing countries can't get energy from cheap low-carbon sources, they will get it from fossil fuels.

While the iron law of climate may seem obvious, many on the left continue to reject it, insisting that turning up the volume with dire warnings of climate apocalypse and civil-rights-style protests can overcome the basic technological and economic obstacles to action. These efforts have only resulted in the intensification of the climate wars and increased the polarization of the issue.

Coming to terms with these realities will require answering a raft of questions. If campaigns based on the dangers of global warming don't work, how can we build a different kind of political consensus for action? Given our increasingly polarized political culture, where are the opportunities for bipartisanship? How do we reduce carbon emissions in the absence of high carbon prices and what strategies can accommodate developing countries' overriding need for inexpensive energy?

In the end, all questions—whether political or economic—return to questions of technology. What will it take to develop energy technologies that are clean, cheap, and abundant? If private firms are unlikely to make sustained investments in the development of those technologies, what role should the public sector play in undertaking those activities? How do we ensure that such efforts will improve the cost and performance of energy technologies, rather than simply subsidizing the production of more of the same?

At the Breakthrough Institute, we've long championed energy innovation and technology investment as the central strategies to address climate change. This approach is consistent with America's historically bipartisan commitment to economic prosperity and geopolitical security and our long tradition of investing in new technologies that have remade American life for the better.

A technology-first policy is not the same as a technology-only one. Better and cheaper energy technologies are a precondition for successful caps or carbon taxes, not a substitute. This is, in fact, how the United States tackled past pollution challenges like acid rain and ozone depletion: First we created low-cost alternatives, and then we implemented regulations to require their widespread adoption. (emphasis added)

Again, New Zealand should be finding a niche in methane-mitigation agricultural research for free distribution to the world rather than beating itself up with an ETS (prior posts here and here).

GE, nuclear and climate

Karl Smith at Modeled Behavior counts himself as a climate dove:

The issue in my mind is that there are actual existing problems in the world today. Yet, the hawks of various breeds are arguing that we should take actions which will make those problems worse in the hopes that we will prevent some larger problem down the road.

As always I question their ability to foresee the real problems that will occur down the road and think that people are generally overconfident their long range forecasts.

Are you sure Iraq is going to use weapons of mass destruction because this could go very badly in the short term and we need be fairly confident that there is a long term win here. We saw how that worked out.

Again, I don’t doubt the sincerity of the hawks. I think they really did believe they were making the world a better place. However, I think there was a tendency to focus on this big PowerPoint-ready existential risk as opposed to the small on the ground risks that were more likely and closer at hand.

Here we have to ask, are you sure that reducing carbon emissions is necessary to forestall the negative effects of climate change. Because, this could turn out very badly in the short term and we need to be fairly confident that there is a long term win here.

I have people telling me that using current technology they could rig up devices to cool the planet at a much lower cost. Are they right? I don’t know. But if they are not insane then are we certain that 100 years of active research into the subject won’t yield low cost solutions?

People are also telling me that the greatest risks are flooding and the necessity of relocating hundreds of millions of people. However, we built housing for 5 billion people over the last century. Can we not do the same over the next?

Count me also as a dove. To the extent that we in NZ ought to be doing anything, we ought to be funding research in ag sciences for breeding lower emission livestock and pasture grasses, then releasing the results via creative commons patents to allow broadest possible uptake.

The environmental movement seems not to be coming around as well, or at least parts of it are:

Stewart Brand, an American activist and former editor of Whole Earth Catalog, said: "I would like to see an environmental movement that says it turns out our fears about genetically engineered food crops were exaggerated and we are glad about that. It is a humble and modest stance to take to the real world.

"Environmentalists did harm by being ignorant and ideological and unwilling to change their mind based on actual evidence. As a result we have done harm and I regret it."

Patrick Moore, one of the founding members of environmental campaign group Greenpeace, added: "We were right that the nuclear industry had problems, but that didn't mean we should be against nuclear energy completely.

"We have caused extra gigatons of greenhouse gases to be released into the atmosphere by being so precious about nuclear."

The activists feature in the Channel 4 documentary What the Green Movement Got Wrong, which will be broadcast this week.

They say that by successfully lobbying against the building of new nuclear power stations, environmentalists forced governments around the world to build new coal fired power stations instead, resulting in billions of extra tonnes of carbon dioxide and pollution being poured into the atmosphere.

Mr Lynas, who along with other activists ripped up trial GM crops in the 1990s, said that GM food had now been consumed by millions of people in the US for more than 10 years without harm, and this had convinced him to change his views.

The campaigners say that since they expressed their change of position, they have been vilified by traditional sections of the environmental movement.

I've seen some argument that coal-fired generation releases more radiation into the environment than does nuclear generation.

Nuclear can't compete with the low costs of hydroelectric generation in New Zealand, at least until some of the lower cost modular options start hitting production. Making things earthquake proof would also seem rather important. But neither of those seem here to be the binding constraint; rather, it's ideology.

What happens to the purported NZ "clean green" image once folks start putting the correct sign on anti-nuclear and anti-GE stands?