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New Year’s Resolutions

We know that global warming has already killed people.

The second Climate Vulnerability Monitor estimated that natural disasters due to climate warming were already killing 5000 people a year in 2010. The same report argued that another half million deaths per year are due to climate change-induced infections and hunger. The number is expected to rise somewhat by 2030.

World Health Organization offers a more conservative view of the number of health related deaths due to climate change: “Between 2030 and 2050, climate change is expected to cause approximately 250,000 additional deaths per year, from malnutrition, malaria, diarrhea and heat stress.”

These estimates are in the same ballpark – In just 16 years between a quarter and a half million people will be dying every year as a result of infections, health problems and starvation due to greenhouse gas emissions.

We don’t have good estimates of the weather-related deaths that climate change will cause. The world health Organization tells us that the number of weather-related natural disasters reported has more than tripled since the 1960s. Every year, these disasters result in over 60 000 deaths, mainly in developing countries. Only a fraction of these are due to climate change so far, but the number is certain to rise.

I think most Canadians would like to see our country working to prevent further deaths. If we knew that even 5% of the deaths caused by hurricanes in New Orleans and the Philippines could have been prevented by energetic Canadian leadership I think we would have acted. We would be more committed to climate action than we are, say, to bombing ISIS.

Canadian leadership is critical: we may be small emitters compared to the USA but we can make a difference. We can set an example and we can fight on the international scene for treaties that will save lives. This kind of leadership is part of the Canadian tradition.

Maybe our personal New Years resolutions should be about making Canada a lifesaver.



Big 25 Emitters Could Force Reductions

I’ve just read a paper called “Analysing Mechanisms for Meeting Global Emissions Target – A Dynamical Systems Approach.” In it Shyam Ranganathan and Ranjula Bali Swain produce several interesting results.

One is that the data show we will overshoot the 44 gigaton target for 2020 by 27.6%. 44 gigatons is supposed to keep warming below 2 degrees.

Another useful fact is that the top five emitters were responsible for over 50% of greenhouse gas emissions in 2005. The Ranganathan and Swain model suggests China wll be emitting nearly 50% of the world’s greenhouse gasses by 2020.

Following up on this they discover that if the world’s 25 biggest emitters were to cut their emissions they could save the world. The Big 25 would have to cut by a bit more than 27.6% to make up for for 175 countries that didn’t cut, of course, but the key message is that the Big 25 don’t have to wait for the rest of the world.

Ranganathan and Swain don’t include the possibility that the Big 25 could also force reduction on the others through trade sanctions.

What this tells us is that even though meetings like COP20 struggle for any agreement, we don’t need to wait for consensus. Expanding the number of players in agreements like the recent one between the US and China may be the way to go.

Have we been outsmarted?

Cap and Trade is a poor way to control carbon emissions for several reasons. In principle it would be equivalent to a carbon tax if applied to all carbon emitters, but can you really imagine putting a cap on each household and then allowing rich families to buy emission permits from poor families? It might be a nice way to transfer income, but it would be an administrative nightmare.

Cap and trade does seem to work if you only have large emitters that are easy to monitor. Even then it is vulnerable to evasion, and exceptions. It does require effective monitoring, and we in Ontario know that governments will even cut back on monitoring water safety to save money. It is hard to believe that any government can carefully monitor emissions by large corporations year after year while dealing with budget constraints and lobbyists pressing for “self regulation.”

But there is another problem that will soon raise its ugly head. As we move to a carbon tax, what do we do about the companies that have been given the right to emit under Cap and Trade schemes? A company that has been given an emission cap is legally entitled to continue to emit. If it has bought additional credits will it be possible to charge a carbon tax on emissions it has already paid for?

It may turn out that, where Cap and Trade has been tried, it will be a major barrier to effective carbon taxation. There must be a way around this problem, but I don’t see it yet. The public may have to buy back the rights. I am starting to think that we have been outsmarted. It could be that Cap and Trade was a brilliant maneouver to block a carbon tax and to transfer money to the wealthy owners of large emitters.

Suggestions anyone?

Northern Ontario Wins When We Move Away From Fossil Fuels

Did you ever wonder what a significant carbon tax would do to Northern Ontario? It isn’t too complicated. There will be effects on what we sell and on what we buy.

We sell wood. Wood “sequesters” a lot of carbon. A lot of wood will be needed to replace concrete all over the world because concrete production releases huge amounts of carbon dioxide and uses a huge amount of natural gas. We will have a lot of dying trees to get rid of as a result of climate change, so our forestry sector wins big in the long run. If we move into cross-laminated timber (Hey Mr, Gravelle! are you listening?) we do even better, because we are adding value to the wood.

Base metals are another win. It takes a lot of energy to produce Iron or nickel, but these metals go into products that are used again and again. They are actually very energy efficient AND they can be recycled. Furthermore, the technology is already available to produce them without fossil fuels. The transition will take time,but it is coming.

The rare earths will get more valuable. They are needed for all the magnets, motors and electronics, specialized material and batteries that are needed to cut energy consumption. We have rare earths. More jobs.

If we can become major suppliers of energy efficient equipment for the mining industry around the world, we will do even better.

We don’t produce fossil fuels, so we dodge that bullet.

On the cost side, fuels and food will cost more. Ironically, most northerners spend less time commuting than their Toronto counterparts, so the “carbon dividend” may actually more than pay for the increased fuel costs. Northern Ontario also has more rivers per capita and more land for bio-fuels, solar arrays and windmills, so we can shift to heat and power sources that avoid the carbon taxes. Increasing fuel costs for industry will be offset by increasing prices for their products, and they will shift to carbon-free energy over time.

Put it all together and I think Northern Ontario wins when we move away from fossil fuels. Maybe I should say wins more than most regions, because the transitions is going to cut costs and give us new technologies to improve our lives no matter where we live.

Carbon Dividend or Economically Efficient Allocation of Carbon Tax Revenues?

Economists will generally argue that returning all of a carbon tax to the people is a poor idea. A basic principle for mainline economists like me is to equalize marginal benefits. If subsidizing solar or insulating city hall has a bigger social return than giving me a check, then that’s the way to spend the money. Economist and many others are attracted to Economically Efficient Allocation.

The advantages of the Carbon Dividend approach are mainly political. First, It is probably easier to sell a carbon tax if we can explain clearly how we make it revenue neutral. The Carbon Dividend is the simplest formulation to sell.

Second, it also appeals to base instincts in a useful way. For the majority of the population – especially the low income end, it will return more than it costs. That should help make it easy to sell.

Third, once it is in place, it will be very hard to take it away. Specific spending plans can be cut back by an unsympathetic government. The Carbon Dividend is politically robust.

Fourth, and this is very important, we will have to raise the carbon tax again and again. The Dividend will make that MUCH easier. Every time the tax goes up the dividend also rises, undercutting political opposition, possibly even getting people to cheer for a higher tax!

Finally, – and this is an equity argument, not a political argument – The dividend will work like a guaranteed annual income. Like it or not, jobs are getting scarcer and we have to find ways to guarantee income for everyone. If we can’t find ways to share the wealth, as Marx pointed out, capitalism will collapse because it is just so darned productive – it constantly replaces workers with machines that don’t buy anything.

It is true that eventually carbon revenues will fall and we will need another solution. The carbon tax is supposed to work itself out of a job! (That might b e a good reason not to cut other taxes.) But we can worry about falling revenues later. In the meantime we will be solving today’s most serious problem.

What Economists Believe About the Economic Tools We Can Use to Respond to Climate Change

This is where economists are really the only experts. Economists believe that economic tools can help reduce consumption, divert investment to creating alternative energy systems, and reduce energy demand.

This is not surprising: economists believe that prices affect people. That is probably the central insight in economcs. A surprising amount of the relevant economic theory is summed up in the simple graph of a downward-sloping demand curve. That image is just a way of presenting the general principle that when the price of something rises people generally buy less of it.

As a result, all economists believe that putting a price on carbon will reduce consumption of fossil fuels. If you don’t believe this, you don’t believe the most basic observations in economics and you aren’t an economist.

Corrective taxes
If prices affect how much people buy, then it is possible for prices to encourage people to buy too much or too little. Make machine guns free and there will be too many machine guns in school yards. Make milk expensive and children may grow up with weak bones.

But what is the right price for fossil fuels? It is easier to talk about what the wrong price is. When we burn any fossil fuel we dump CO2 into the atmosphere. Another way to say this is that we are getting garbage removal for free. Whenever price charged by fossil fuel companies leaves out important costs like garbage removal, climate change, pollution and nasty health effects, consumers are not paying the full price of using fossil fuels.  The price is too low, so they burn more than they should.

When important prices are too low, markets simply cannot be efficient. They are broken. Economists call the results “market failure.”

With fossil fuels the scale of the inefficiency is actually startling. Burning one ton of coal with a carbon content of 78 percent and a heating value of 14,000 Btu per pound to produce electricity adds a roughly 2.25 tons of CO2 to the atmosphere.  A common estimate of the appropriate carbon tax is about $70 per ton, which means the carbon tax on a ton of coal should be in the range of $167. One pound of coal produces roughly one Kilowatt hour of electricity so a ton of coal produces roughly 2000 kWh which, at the higher of Ontario’s residential rates, has a retail value of about $200.   This suggests that electricity from coal should cost almost twice as much as electricity currently costs in Ontario. Households are paying only half the economic price for electricity generated form coal plants.  At that rate they consume vastly more electricity than they should.

A similar calculation tells us that we should be adding a carbon tax of $23 for each barrel of oil (and at least $27 for oil from Alberta’s bitumen mines)

A. C. Pigou, showed that when prices are wrong the public can correct them using taxes or subsidies. These “corrective taxes”  or Pigovian taxes” actually make the economy more efficient. Most economists believe that the fossil fuel industries should be subject to corrective taxation. To be more specific, most economists believe that a carbon tax would promote economic efficiency. This conclusion is a necessary result from basic economic theory.

Economists who support a carbon tax
Conservative American economist Greg Mankiw, author of one of the most popular introductory economics texts, and chairman of the economics department at Harvard University,  has listed members of what he calls the Pigou Club, “an elite group of economists and pundits with the good sense to have publicly advocated higher Pigovian taxes, such as gasoline taxes or carbon taxes.” Included in the list are

  1.    Greg Mankiw (Fortune 5/24/99, WSJ 1/3/06, 5/31/06)
  2.    Bill Nordhaus (Foreign Policy in Focus 3/27/06)
  3.    Martin Feldstein (WSJ 6/4/92)
  4.    Gary Becker (Businessweek 5/27/02)
  5.    Robert Frank (NY Times 2/16/06, 6/8/06)
  6.    Andrew Samwick (his blog)
  7.    Ted Gayer (Regulation)
  8.    Mike Moffatt (about.com)
  9.    Ken Rogoff (Project Syndicate)
  10.    Paul Krugman (Slate 4/18/97)
  11.    Greg Easterbrook (NY Times 5/25/04)
  12.    John Tierney (NY Times 10/4/05, 5/23/06)
  13.    Jonathan Rauch (National Journal 2/9/02)
  14.    Thomas Friedman (NY Times 9/21/05, 2/8/06, 6/16/06)
  15.    Joe Klein (Time 5/7/06)
  16.    Andrew Sullivan (Time 4/11/04)
  17.    Jane Galt (her blog)
  18.    Christopher Farrell (Businessweek 8/19/05)
  19.    William Baldwin (Forbes 6/19/06)
  20.     Clive Crook (National Journal 6/2/06)
  21.     Al Gore (Charlie Rose Show 6/19/06 at 42:45)
  22.     Alan Greenspan
  23.     George Schultz,
  24.     Tony Lake,
  25.      Nicholas Stern,
  26.     Hal Varian,
  27.     Larry Summers,
  28.      Richard Posner,
  29.      Nouriel Roubini,
  30.      Joe Stiglitz,
  31.      Brink Lindsey,
  32.      Tim Harford,
  33.       Rob Stavins,
  34.       Ray Magliozzi,
  35.       Robert Samuelson,
  36.       Dan McFadden,
  37.       Charles Krauthammer,
  38.       Paul Mulshine,
  39.       Kevin Hassett, Jason Furman,
  40.       Anne Applebaum,
  41.       Paul Volcker,
  42.       Bill Frenzel,
  43.       Isabel V. Sawhill,
  44.       Charles Stenholm,
  45.       William Hoagland,
  46.       Robert Shapiro,
  47.       David Leonhardt,
  48.       Morton Kondracke,
  49.       Gilbert Metcalf,
  50.       Fred Foldvary,
  51.       Arthur Laffer,
  52.       and a majority of economists.

Nobel Prize winners are in bold type. This list is not complete, and it does not include the Canadian and other non-American economists that support a carbon tax. In fact, most economists around the world believe that a carbon tax is needed  and a carbon tax is the best tool available. Period. Support for a carbon tax is actually a reasonable test of how well trained an economist is. If someone says they don’t support an carbon tax it generally means they are not an economist, and if the person has some credentials as an economist, it means they are not a very well trained economist. It might be possible for someone with a training in economics to argue that carbon taxes would not promote a more efficient economy, but it would be an intellectual strain, like a physicist arguing the earth is flat.

Most economists recognize the obvious fact that carbon taxes can raise stable revenues: existing carbon-related taxes, like gas taxes, have been raising sizeable revenues for years. Raising them significantly would therefore both achieve environmental improvements and allow other taxes to be lower. This isn’t just theory, by the way: British Columbia has shown that a carbon tax does reduce the use of carbon and raises revenue. British Columbia has shown that  governments can use carbon revenues to lower taxes.  Many economist argue for a carbon tax because it allows other taxes to be reduced.

Economists believe that a carbon tax will be resisted because people see all taxes as directly reducing their purchasing power and do not fully recognize the benefits generated by those taxes.

Many economists believe, however, that the public can be won round to green fiscal reform.

A number of polls show majority public support in Britain for a green tax shift, and support  increases when people are persuaded that the green taxes will be used to reduce other taxes .See the UK Green Fiscal Commission Report a thttp://www.greenfiscalcommission.org.uk/images/uploads/GFC_FinalReport.pdf) The existence of the  Canadian Ecofiscal Commission} headed by Dr. Chris Ragan demonstrates the confidence of at least a significant group of Canadian Economists in the political feasibility of carbon taxation. The Environmental Commissioner for Ontario notes that Research has shown that public support for a carbon tax hinges on how the revenue is used. In one American poll, he notes, the public supported a carbon tax most when the revenues would be used to fund renewable energy.

Cap and Trade and Carbon Offsets
Most  economists believe that  in theory cap and trade could work as well as carbon taxes. We like clever theories. Many of us like the idea of creating a market to solve a problem.

Some economists believe that cap and trade will actually work in practice. A few believe it has worked in Europe.

Most economists understand that cap and trade is a bureaucratic approach that requires measurement, reporting, and verification to be effective.   It does create a market, and  is technically a `market-based’ approach,’ but it requires the creation of an agent or collection of agents to issue rights and monitor compliance. It require a government decision about the amount of emission permits.

Most economists believe that Cap and Trade might be easier to implement politically than a carbon tax because the economic incentives are positive for the companies involved while the costs are hidden for consumers:  with Cap and Trade you buy off companies with additional property rights and hide the cost of the implicit subsidy from consumers.

Most  economists recognize that  Cap and Trade is a form of privatization — the rights to emit are transferred to private corporations.

Cap and Trade schemes are usually associated with a system of carbon offsets. You can pay someone to plant a tree to offset the carbon released when you fly to the Bahamas. Economists recognize that under the Clean Development Mechanism of the Kyoto  Protocol, carbon offsets tend to transfer income to less developed countries, as they were intended to do. Some economists approve of the transfer, others don’t. (Prime Minister Harper, who has an MA in economics, called it a form of socialism when he worked for  the self-styled Canadian Tax Foundation.) Some think it is an effective mechanism, others don’t.  Carbon offsets  create a market for sequestration that most economists probably  think could work in principle. that has worked to some extent but is prone to fraud,  hard to verify, and complex. The offset market is market trading an asset that only exists if a public agency says it does.

I think all economists understand that a carbon tax will favour consumers  and that Cap and Trade favours existing producers by giving them an additional property right. I think that most economist would think it obvious that  for carbon taxes to be fair, however, low-income households would need to be protected from energy price rises while their homes were being made energy efficient. The Britich eco-fiscal commission suggeested that a massive  programme to improve the energy efficiency of existing homes for social as well as environmental reasons would be necessary. Such a program would provide an economic stimulus according the the economic theories most economists believe. It would probably pay for itself according to most energy accountants.

Most economists don’t believe that  Canada is doing a good job of getting ready for the new economy because of commitments to the energy industry.

Economists believe that, in general, subsidies are a bad idea and that reducing subsidies is a good idea.  Subsidies for fuel consumption or for producing fossil fuels encourage the production of more carbon dioxide.

Most economists believe that petroleum  and tar sands  production in Canada is heavily subsidized – and some, like the analysts at the International Monetary Fund in ENERGY SUBSIDY REFORM: LESSONS AND IMPLICATIONS  (Available at (http://www.imf.org/external/np/pp/eng/2013/012813.pdf), argue the effective subsidy is in excess of  of 30% of the price ( If there is a technical word for encouraging people to do bad things, it is “stupid.”  We do have some very stupid policies in Canada.  The paper warns that “These estimates are likely to underestimate energy subsidies and should be interpreted with caution.”).

Using Regulations
No economists believe that regulation is an efficient tool  in general, although most believe that regulations can help cut carbon in specific ways, and most believe regulation will be necessary. Mandating fuel efficiency for automobiles in California, for example, forced technological developments that did reduce emissions. The reason it worked is that California was such a large market that automakers couldn’t afford to be excluded. Once that tooled up to produce cars for California, it was cheaper to produce the same cars for the rest of the USA.

Regulations generally require oversight, enforcement, prosecution and penalties, all of which involve costs. When observing behaviour is imperfect, regulation will usually be incomplete as well as costly.

Reducing Carbon Intensity
The Canadian government’s preference for regulating carbon intensity is a non-market approach that does not provide a direct incentive for reducing emissions. It seems attractive because it encourages emitters to reduce emissions per unit of output. It also seems to be good for economic growth because it does not influence output. This is in fact a misunderstanding of the economics involved.

Total Carbon emissions from any sector can be represented as a box. The width is the amount of output and the height is the intensity. Reducing Carbon Intensity reduces the height but allows the width to increase. In Alberta’s bitumen deposits, for example, even though producers emit less carbon dioxide per barrel, they are producing so many more barrels that emission have risen and will continue to rise.

A carbon tax encourages people to reduce both height and width. Here is where a deeper understanding of economics helps. If you just look at one market, the carbon tax seems to reduce production, and this seems to mean it reduces growth. Looking at one market this way is called `partial equilibrium analysis.”

A carbon tax doesn’t reduce total growth in the whole economy, however. Instead it encourages  growth to move to sectors that use less carbon. Studying how the effect of a policy spreads to other markets is called ``general equilibrium analysis.” Economists developed general equilibrium analysis because it is more accurate that partial equilibrium analysis.

Adding it up
To summarize, most economists would accept the conclusion of the UK green Fiscal commission in 2009:

  1. Carbon taxes work
  2.  Carbon t axes are efficient
  3.  Carbon taxes can raise stable revenues
  4.  The public can be won round to carbon taxes
  5.  Carbon taxes would stimulate investment in the low-carbon industries of the future
  6.  Carbon taxes can mitigate the impact of high world energy prices
  7.  The impacts of Carbon taxes on competitiveness can be mitigated

In other words, most economists would assent to the view that carbon taxation will help get Canada on a low-carbon trajectory, help develop  new industries, provide competitive advantage, and contribute to fiscal stability.

Cutting Fossil Fuel Consumption Does NOT Mean Cutting our Standard of Living.

You have been told that limiting fossil fuels will reduce our standard of living. That is the basic economic argument put forward by Republicans in the USA, many climate change deniers, Vic Fedeli, who wants to be Conservative leader in Ontario, and economists who see themselves as realists. It isn’t a lie, just an error.

Or rather it is a collection of errors. It is involves errors about energy intensity, energy supply, and a deep confusion about what “standard of living means”. Lets take these in order.

The pessimists assume that we can’t reduce energy intensity very much. Producing a hammer in 2020 will take as much energy as it did in 2014. This is absolutly absurd. Virtualy every product  we buy is being re-engineered to reduce the energy required to produce it. Just think about lighting. Do you remember incandescents? Fluorescents? Compact fluorescents? LEDs?  In an amazingly  short time we have moved through a series of technologies that reduce energy intensity. And have  you noticed that computers, phones and cars are getting smaller lighter and better? Declining energy intensity happening before your eyes. Cell phones don’t require coppper wires to connect them: less energy required.  Fibre optics? more signal, less energy to produce or operate. The rule is that energy intensity will fall. And in every case the quality of your life improved!

And do remember that  the federal government has based its whole policy for restraining Canadian emissions of CO2 on reducing energy intensity in the tar sands. Those conservatives believe it is easy to cut energy intensity! It really is too bad that they didin’t introduce a carbon tax. that would have speeded up the process quite a lot.

Reducing energy intensity alone is not enough to sharpy reduce fossil fuel use, especially with rising world population, but it helps.

The pessimists also assume that we can’t find alternate sources of energy. This has proven wrong – Solar is getting cheaper, wind is getting cheapers, storage technology is blossoming. Denmark, for example, with one of the highest standards of living in the world, honestly plans to be completely off domestic use of fossil fuels. Despite rapidly rising standards of living for a huge population, China has promised to start reducing emissions  by 2050. That is the equivalant of turning the Titanic aroud in half an hour. Pessimists think the Chinese are lying. They are ignoring the fact that the Chinese need to cut fossil fuels for health and political reasons,  and they are ignoring the fact that the Chinese  seem to be are on track to succeed.

The pessimists also assume that energy-dense stuff is the secret ingredient in a happy life. Philosophers have beens saying for centuries this is not true, but now science is showing that a smile from a friend does more for most people  than a new hat or a bag of chips. If you look at what people are spending money on, you discover that they are spending more and more on phoning friends, playing video games, listening to music, watching movies and TV. All  of these activities are information goods. Information goods are not like hammers. Once the first copy has been produced, it can be copied virually for free. In other words, consumption is expanding, quality of life improving and the energy needed to imporve the quality of life  is minimal.

Put it together and what have you got?  (that is a line from a song, by the way) You have NO convincing reason to think that cutting fossil fuels will reduce the qualtiy of your life. NO reason at all to be afraid of acting on climate chamge!

In fact, you should be expecting  a kind of hurricane of energy-reducing innovations that make your life better. It is those pessimists who are holding us back!