HAVE THE UK’S ENVIRONMENTAL POLICIES RESULTED IN UNNECESSARY RISES IN HOUSEHOLD ENERGY BILLS?

That is one thesis of Dieter Helm’s latest report for the UK government, a review of the cost of energy. Helm attempts to bring some rigorous economic analysis to economic and environmental policy that has often appeared to consist largely of ad hoc patches and “initiatives”. However the report has attracted criticism, notably from Richard Black, Director of the Energy and Climate Intelligence Unit, who argues that the report is lacking on evidence, even on such simple questions as the actual extent of energy price increases, or whether the UK really is seriously out of line with other European countries.

One particular criticism appears to hit home, the accusation that Helm has simply cherry picked the data, using 2004 as a base year, even though it was characterised by unusually low energy prices. This, Black claims, is the kind of dishonest twisting of evidence practised by climate policy sceptics such as Lawson and the Global Warming Policy Foundation (whose work is addressed on another page). However the broader divide is between Helm, who, like many economists, has a strong preference for more direct carbon pricing approaches, and Black, who argues that in an imperfect world, we should be more prepared to accept a “mixed” approach.

There are other nuances. Black attempts to link Helm with Lawson, both having been significant witnesses in front of the House of Lords Select Committee, whose rather inadequate report appeared earlier this year. This seems unfair to Helm. I have commented before[1] on the weaknesses of the Select Committee report but Helm has little in common with Lawson’ refusal to accept the evidence and logic for warming provided by climate science.

It’s worth making a number of points on the general subject of energy prices and carbon taxes and their place in relation to climate policy. Regular readers of blog will have heard some of these arguments before, so please excuse the repetition.

First, the exchange rate is a much more important driver of international competitiveness than energy. Significantly we have heard very little about industrial energy prices since the Brexit induced fall in sterling. In part this may be because Brexit is a much more serious existential threat to the UK economy, but mainly it will be because the UK comparative position will now look much better.

Second, economists rightly stress the virtues of a rational approach which far prefers a transparent carbon tax or price to ad hoc policy interventions that can have unfortunate or even perverse consequences. However, as Black clearly feels, the real world is sometimes more complicated. The truth is that the EU ETS, the only international carbon pricing mechanism to which we currently have access, has been a dismal failure, not producing a realistic carbon price, and again this has been the subject of earlier commentary. Unsurprisingly most member states have adopted additional measures in a similar manner to the UK.

Third, if the UK were to adopt carbon taxes at a level that reflected the long term social, environmental and long term damage, it would need to be fairly substantial. A figure of £100/tonne of CO₂, for example, which is well above most estimates of the point at which baseload nuclear becomes economic, but well below any estimate of the carbon sequestration from the atmosphere, would add nearly 4p/kWh to the unit price of electricity generation (given the current mix). This is if anything rather higher than the cost of current policies.

This should help us put the issue in perspective. It is of course true that recovery of public policy costs through utility prices is an unsatisfactory way of doing things. As we may see, in future comments, it is an approach that becomes unsustainable in a world where, increasingly, customers can try to escape this form of “tax” through their own generation.  But that is an interesting subject for another day.

---

[1] In this link and the two subsequent postings

GLOBAL WARMING. POSITIVE NEWS BUT A THREAT UNDIMINISHED

A recent (September) article in the journal Nature Geoscience has been quite widely reported as an indication previous scientific studies have over-estimated the extent of global warming. Many followers of climate science and observers of climate policies will have been surprised by some of the headlines. Not least, the stream of evidence over the last few years has, even to a casual observer, indicated global temperature increases very much in line with a strong upward temperature trend. Other indicators such as the rapid decline in Arctic sea ice, have offered little comfort, or suggestion that any of the earlier projections have been overestimates.  

Has this turned out to be entirely a good news story? How has it been reported? And will it have a positive impact on the promotion of effective climate policies? Closer examination reveals some important qualifications, some additional information and potential for some dangerous misinterpretation of a piece of serious climate research. The worst possible conclusion to draw is that these revised estimates in any sense reduce the sense of urgency that should attach to climate policy.

First of all clarify what the paper actually tells us.

Just clicking on the Nature Geoscience link provides an abstract of the paper itself, a technical and suitably restrained summary of some recent climate modelling work based around, inter alia, a number of estimates of climate system parameters from the IPCC Fifth Assessment Report. It is reproduced at the end of this comment for the benefit of readers. In the abstract, the authors (who include my colleague Myles Allen from the Oxford Martin School) avoid dramatic language, and the strongest claim with obvious policy relevance was that “limiting warming to 1.5 °C is not yet a geophysical impossibility”.

The backdrop of course is that the Paris agreement adopted an aspirational target of 1.5 ^oC of warming, which had widely been seen by many climate experts as now beyond reach, even on the most optimistic policy assumptions. The relevance of the article is that, while many scientists may previously have estimated that the remaining “budget” of future CO₂ emissions consistent with the target was impossibly small, the revisions suggest it may be larger, and closer to what is attainable tyrough effective policy. If the glass of acceptable CO₂ concentration really is only 92% full rather than 98%, then the budget is four times as big. But four times a very small number is still a very small number, as the authors emphasise.

And some balancing bad news

Another report, due to be published shortly, but whose findings were previewed at the Oxford Energy Day, (Pfeiffer et al) has some much less welcome findings. Power generation, which currently contributes some 30% of CO2 emissions, is on course to emit much of the headroom identified as available for the 1.5 °C target. Currently operating power generators will absorb 41% and generators in pipeline another 36%, unless closed prematurely, underutilized or retro-fitted with CCS. This reduces the already very tight headroom for other (much harder to decarbonise) sectors, and for other GHGs.

How was the story reported?

First reports in the British press were on the whole fairly accurate. Typical was the Independent [or rather The I]. Computer modelling used a decade ago … may have forecast too much warming a study has found. The study does not play down the threat which climate change has to the environment, and maintains that major reductions in emissions must be attained.  But the findings indicate the danger may not be as acute as was previously thought.

Then the commentators moved in. Comment by Graham Stringer MP in the Daily Mail, for example, verged on the hysterical. This and similar comment from sources such as Breitbart led the authors to respond forcefully in The Guardian on the misrepresentation of their research.  

But do these revised estimates cast doubt on the wider credibility of climate predictions, or lead us to consider whether the urgency of climate policy is understated.

Wider credibility of climate policy. Is warming still happening?

The first point is easily answered. The potential revisions under discussion all lie comfortably within the range of future projections. They are in effect a small scale adjustment comfortably within the range of possible outcomes. The main reason for their potential importance is that they provide, prima facie, a slender piece of evidence that the 1.5 °C target may still be attainable.

Anyone still seduced by the views of Lord Lawson, the GWPF and others, that warming stopped in 1998, should simply examine the global temperature measurement of the last few years. The Lawson argument seized on an exceptional el Nino year (1998) and pretended that no warming could be detected. [El Nino events tend to produce substantial blips in temperature. This was always an entirely  specious argument, and is addressed in more depth elsewhere on this site (on the page SCIENCE VS SCEPTICISM),  and a wilful ignoring of the underlying temperature trends. Its fallacious nature was underlined, at least visually, by the return of an el Nino in 2015 and 2016, breaking global temperature records in successive years.

Does the extra headroom give us any reason to relax the urgency of climate policy?

We have already identified several reasons why not:

·         the scale of the downgrading is relatively trivial and well within the predicted ranges; in this sense it is no  more than a minor adjustment to best estimates proposed by one of the entities currently modelling climate

·         the small amount of extra emissions headroom in  is roughly equivalent to the “bad news” on fossil power generation, although much of this is, implicitly at least, already factored into policy making

At a deeper level though we need to recognise that there are some even more important fundamentals.

·         One is that the targets, whether for 1.5 °C or 2.0 °C, are to a large extent arbitrary. We do not know with real confidence that either is even “safe”, although they are often described as if they represented some kind of hard border between safety and disaster. Normal caution, of the kind we would exhibit in other contexts, should be the real driver for policy.

·         The second fundamental is that even much smaller levels of warming will have serious adverse consequences, some of which we are starting to see in changing weather patterns and the higher incidence of extreme events. There is therefore a massive social cost from the levels of emission that we have allowed to date. The corresponding benefit of urgent action is huge.

·       The third fundamental reflects ideas from the theory of rational decision making. There is a huge option value to slowing down the rate of change in climate. It provides extra time both to meet targets, to prepare defences against the worst consequences of extreme warming, or to mitigate them through currently impossibly technologies for carbon sequestration.

........................................................

Abstract. The Paris Agreement has opened debate on whether limiting warming to 1.5 °C is compatible with current emission pledges and warming of about 0.9 °C from the mid-nineteenth century to the present decade. We show that limiting cumulative post-2015 CO2 emissions to about 200 GtC would limit post-2015 warming to less than 0.6 °C in 66% of Earth system model members of the CMIP5 ensemble with no mitigation of other climate drivers, increasing to 240 GtC with ambitious non-CO2 mitigation. We combine a simple climate–carbon-cycle model with estimated ranges for key climate system properties from the IPCC Fifth Assessment Report. Assuming emissions peak and decline to below current levels by 2030, and continue thereafter on a much steeper decline, which would be historically unprecedented but consistent with a standard ambitious mitigation scenario (RCP2.6), results in a likely range of peak warming of 1.2–2.0 °C above the mid-nineteenth century. If CO2 emissions are continuously adjusted over time to limit 2100 warming to 1.5 °C, with ambitious non-CO2 mitigation, net future cumulative CO2 emissions are unlikely to prove less than 250 GtC and unlikely greater than 540 GtC. Hence, limiting warming to 1.5 °C is not yet a geophysical impossibility, but is likely to require delivery on strengthened pledges for 2030 followed by challengingly deep and rapid mitigation. Strengthening near-term emissions reductions would hedge against a high climate response or subsequent reduction rates proving economically, technically or politically unfeasible.

G20 POLITICS, TRADE, AND CLIMATE.

This blog will remain quiet over the next several weeks as the author is also working on some substantial papers about low carbon issues, not to mention some summer relaxation.

Angela Merkel has indicated she will not shrink from confrontation with Trump in the forthcoming G20 talks, where free trade and climate change are both on the agenda. I suspect this is a good demonstration that trade, energy and climate will increasingly be interlinked in international affairs. Trump of course has unconventional notions of what free trade actually is, and, albeit somewhat incoherently and inconsistently, seems wedded to the view that the threat of climate change is some kind of hoax. Nations that have committed to Paris and are following through on low carbon technology and investment are not going to take kindly to unfair competition from producers who can undercut them by refusing to take climate policy seriously.  Some economists have even gone so far as to propose border adjustment taxes, a form of tariff on imports, to level the playing field. Trump’s position is in any case inexplicable even in normal rational terms of US self-interest. But this row will also put the UK’s own Brexiters somewhere between a rock and a hard place. Will they go with the rest of the world, or will they follow Trump, the DUP, and the apostles of right-wing fundamentalism – Lawson, Redwood, Rees Mogg etc, in the delusion that the clear messages from the science on climate change are simply wrong?

One of Trump’s most important bases for political support is the “rustbelt” regions of coal and steel, which have suffered dramatic economic decline in recent years. Part of the story, for coal at least, is that it is being pushed out of the energy mix in the US by the success of fracking in making the US close to self-sufficient in oil and gas. Inter alia this has also had some knock-on effects, reducing the price of coal on world markets, and increasing coal consumption in some EU countries. So trade has been at least a partial relief for a hard-pressed US coal industry.

More generally Trump’s policies seem to care little for the “left behind” in the rustbelt. One possible reconciliation, between declining coal and a rising urgency for action on climate, might have been investment in carbon capture technology, widely seen as an essential technology for a low carbon future, simultaneously protecting or even increasing domestic coal demand and providing new jobs in infrastructure, but that option has not even featured on the radar. Trump prefers to stick to the unthinking slogans of his campaign, professing support for American jobs while doing little in reality to support the “left behind”. In fact an isolationist US that ignores new low carbon technologies will most likely cost American jobs, probably in the short term and certainly in the long term.

Brexit, Free Trade and the Hard Right in the UK

But another interesting paradox is the position of British politicians now trying to take the UK out of Europe, and out of the single market and customs union, in the interests of more free trade in a global environment that will be increasingly unfriendly to countries that choose to ignore their responsibilities on carbon emissions. An important part of the “official” argument for leaving the EU was for free trade with the rest of the world, but a very large part of political establishment support for Brexit also coincided with vigorous opposition to taking any action on climate – Lawson, Redwood and Rees Mogg being just three of the more extreme polemicists in this area[1]. Outside the “establishment” UKIP and Farage have followed the same line, and I drew attention in earlier postings to the close correlations between support for Brexit and opposition to climate policies. This was evident not just among politicians, but among Leave supporting economists, including Leave’s most prominent economists Patrick Minford and Roger Bootle, who argued that exiting the EU would enable the UK to escape EU regulations linked to climate change.

To be fair to Minford, he was at least in some respects consistent, arguing both that trade deals, post Brexit, were an irrelevance, and that the UK should accept the further decline of its manufacturing base, concentrating instead on services. But, unsurprisingly, that has not been the Leave political line, nor would it have played well with Leave voters in the North of England. 

May’s government, faced with the appalling consequences of actually leaving the single market and the customs union, is however desperate to be able to demonstrate the prospect of a lucrative new trade deal with someone else. Step up to the plate, the UK’s largest trading partner after the EU – the USA and Mr Trump. Never mind the negative sides of such a deal for British farmers and consumers, the reality is that Mr Trump appears to believe in bilateral balances, the next best thing to barter in the modern world. Since the UK has a surplus with the USA, one of the few major economies for which this is true (it is in deficit with the EU for example), this looks like a recipe for disaster in any trade deal. Opposing Trump on climate matters is hardly going to help.

In fact May is now signalling solidarity with Merkel on climate at least, although whether we should put this down to the UK’s legal obligation under the Climate Act, or to a growing realisation that perhaps the EU does matter after all, not to mention global climate, is not clear.

Trade, Climate, and Carbon Taxes

If nothing else the prospect of conflict on both climate and trade, in the forthcoming G20, demonstrates the potential for close political connection between the two. But the inseparability of the issues has always been clear, however much that may upset the ideological position of most of the Brexiters. . A corollary of “free and fair” trade means, in a post Paris world, going along with what is now the global consensus on climate. Defaulters cannot be allowed to compete on an equal basis with countries who are taking measures that may damage their competitive position. This idea also sits behind the EU’s understandable, though not very effective or successful, attempts to establish an EU-wide arrangement for trading emissions. This at least provides a level playing field for intra-EU trade.

Two Oxford economists, Hepburn and Helm, have long proposed, most recently in a February 2017 letter to the FT, a carbon border tax.  Lakshmi Mittal made the case for a carbon border adjustment to put European steel on a level playing field with global competitors, to inhibit “leakage” of emissions to other countries. Hepburn and Helm simply extend the argument to other energy or carbon intensive sectors. It is increasingly clear that carbon taxation regimes are likely to be more effective than rather inflexible emissions quota trading. Needless to say, such a regime would have major ramifications for trade. Not least it would have demolished the cost advantages for EU generators in switching to cheap US coal dumped on world markets. Even if it has yet to gain much political traction, the idea of carbon border taxes emphasises the close interactions of trade and climate policies.

           

           

---

[1] The Brexit trio of Johnson, Gove and Davis also have form in this area, but are somewhat more nuanced.

COST OF CAPITAL ARGUMENTS AND CLIMATE POLICY. PART ONE.

Debates on policies to combat climate change often include a collection of long running arguments around the cost of capital, or the time discount rate for comparing costs and benefits. These were prominent in arguments over the recommendations of the Stern Review, mainly in attempts at a cost benefit analysis (CBA) of the public policy case for action to mitigate climate change. But assumptions on cost of capital do also matter a lot in what are now the very real questions of comparing alternative investments to reduce emissions. And of course the actual cost of capital employed will have a major impact on the affordability of future energy use, and prices to consumers. Sadly this is one of the areas where the disciplines of economics and finance have been at their weakest, in failing to provide a rigorous and consistent approach to the subject, at least in relation to the public discourse.

Let us start with the public policy arguments around climate policies, and the claim sometime made that the case for action depends on the assumed discount rate, the rate at which we discount the significance of future benefits or costs. One version of this argued that the costs calculated by Stern[1] could only justify action to mitigate climate change if the time discount rate could be assumed to be 1% or lower. Given that even a modest probability of human extinction (or more realistically of the massive forced reductions in population of the kind against which some environmentalists warn us) might be considered to have a near infinite cost, the approach was always intrinsically unlikely to convince anyone. At times, much of the debate on this subject resembled nothing so much as the supposed[2] discussions of mediaeval scholars as to how many angels could stand on the head of a pin.

The real problem in these arguments was the weakness of a cost benefit approach in dealing with systemic risks and possible catastrophes on a long term and global basis. CBA is usually targeted on situations where the alternatives can in some sense all be considered “at the margin”, Inter alia it became increasingly clear that the real problem lay less in evaluating notional GDP projections in alternative climate scenarios, and much more in the climate induced consequences, including migration and conflict. These considerations were compounded by the problem CBA has in dealing with uncertainty and with risks that are not amenable to simple probability quantification. Add to that the nature of the potential risks, which are on an unimaginable scale, and it ought to be clear why the calculation of the costs of a dystopian future, for comparison against an almost equally impossible set of counterfactuals as a baseline, is a rather futile exercise.

Economic models designed for fairly simplistic macro-economic analysis (and they often prove to be not very good even for this relatively straightforward task) were applied to timescales and hypothetical events well beyond their design capability, and it was quickly recognised that they did not come remotely close to capturing the true nature of climate risk. What is now accepted, and is implicit in the international acceptance of the Paris agreement, is that the risk of climate catastrophe is simply too big to be borne, and that mitigatory or remedial action is therefore a necessity.

Fortunately this part of the argument over climate policy is now settled in the public domain, with almost all[3] nations united in their recognition of the need for actions of the kind indicated in Paris[4].  Cost of capital arguments were ultimately of little importance in determining the fundamental imperative for policy action in relation to climate. Even so the arguments were revealing in the differing attitudes they uncovered. Nigel Lawson’s polemic[5] against science driven climate policies argued strongly that we should care increasingly less for the futures of our grandchildren or more remote generations, arguing for much higher discount rates, of the order of 10% or more, largely on the grounds that these were closer to the target rates applied in business decision making.

The impact of discounting at such high rates makes damages a 100 years hence worth a very small fraction in terms of today’s values. Unfortunately for this argument, and as we suggest above, the scale of the perceived risk – sometimes stated in worst case scenarios as a forced population reduction of many billions - can also be described as almost infinitely large, and this is clearly the position implicit in what we might describe as the “Paris consensus”.

The Lawson position was, I suspect, based on a profound misunderstanding of how business works, especially in extrapolation of the most superficial approaches to investment appraisal. It may reflect multiple confusions over the way businesses treat investment appraisal, the debt and equity balance, use of real or nominal rates, and the appropriate assumptions about market correlation, which are a major feature of the standard CAPM model of finance. Another interesting corollary of using a high discount rate would, of course, be that it would not be necessary to set aside any significant sums today for nuclear or other decommissioning in 100 years time. Needless to say this is not an approach that is argued very often.

Lawson’s hypothetical rates are so far from the actual rates of return achieved in most business, most of the time, that we must assume one of two things. Either business is incompetent in investment appraisal, or Lawson just does not understand the subject. As he was perhaps one of the less able Chancellors of modern times, and remains someone who clearly fails to get to grips with climate science or the interpretation of statistics, the latter seems more likely.

The reality seems to be that, under the right conditions, major projects can be financed at very low real rates of interest. But that is an important issue to which I hope to return.  The subject remains important in practical terms, both for choosing investments and making them affordable.

---

[1] To give credit to Stern he never proposed CBA as a main driver of policy, and his post-Review thinking on the subject gave much more weight to the catastrophe avoidance arguments.

[2] In fact this may be an early modern fabrication, or simply an illustration of a category error in a more substantial metaphysical discussion.

[3] The exceptions being Trump’s USA, and Nicaragua, but the latter on the grounds that the proposals did not go far enough.

[4] The reality of actions is of course far less clear, but there is progresss.

[5] An Appeal to Reason.  Nigel Lawson. Duckworth Overlook, 2008.

NEGATIVE NET CARBON. DIRECT EXTRACTION OF CO2. IS IT A GAME CHANGER?

DIRECT EXTRACTION OF CO2 FROM THE ATMOSPHERE.  IS THIS REALISTIC? IF SO IT COULD BE A GAME CHANGER?

A Swiss company has told the Carbon Brief website that there is a real prospect of reducing the costs of the direct extraction of carbon dioxide from the atmosphere to a point where it will be possible to consider large scale operations that could substantially offset current emissions and even feature in attempts to reduce concentration levels, in the so-called “zero carbon” or “net negative CO₂” policies that many people consider are implied in the Paris agreements. If their promises are realistic, then this would be a truly revolutionary development, with profound implications for our approach to climate policy. But there will be a lot of questions to answer on the way.

A Swiss company has opened what is believed to be the world’s first ‘commercial’ plant that sucks carbon dioxide from the atmosphere, a process that could help reduce global warming, it is claimed. The firm, Climeworks, expressed confidence they could bring down the cost from $600 per tonne of the greenhouse gas to $200 in three to five years with a longer term target of $100. This is almost an order of magnitude lower than previous estimates of the cost of direct carbon extraction, widely assumed to be around $1000 per tonne.

This is also one of the two most important candidates for a game changing technology breakthrough that I identified in my 2016 submission to the House of Lords Inquiry, which can be viewed as a separate page on this site. If it proves to be feasible then it may represent a considerable advance on what has hitherto been considered the only feasible route to net negative carbon, the so-called bio-energy with carbon capture and storage (BECCS) approach. Shortcomings of the latter include the limited supply of bio-energy, not least due to land availability constraints, and controversy over whether this really represents a sustainable approach[1]. So direct sequestration, if feasible, is very attractive.

There are clearly still a large number of outstanding questions before we get too excited by this prospect.

Is $200 or $100 per tonne really achievable? And if so is the technology scaleable? And to what scale[2]? If it is scaleable, it seems likely the world could be seeking an expansion of the process well beyond the 1% of current emissions suggested as an ambitious target by Climeworks.

The other big question is how to dispose of the CO₂ after its capture. This is a big issue, and a very substantial part of the cost for all carbon capture technologies, including those based on removing the CO₂ from fossil fuel combustion. This cost needs to be factored in and is bound to be a fairly substantial element in the total. It does not appear to be included in the Climeworks figures. Moreover the disposal issue, at scale, will raise its own environmental and risk issues.

But if these questions can be answered this could be a very significant technology advance. It is certainly not the magic bullet that solves all problems, but it could have some important consequences for the way we look at climate policies. Why?

First, one of the most terrifying features of the climate change threat is the apparent irreversibility of the processes involved. CO₂ emissions are cumulative. If they cannot be removed on any scale, then there is a real risk of a future where the climate science starts to tell us there is no return.  At this point priorities would take a dangerous turn towards survival rather than the global idealism, or at least hope, that underpins global agreements. But it is not just that dealing with a very expensive problem is psychologically more attractive than coping with the prospect of unavoidable catastrophe. Ability, in principle at least, to partially reverse out of the worst consequences, puts a finite bound on the costs of making the wrong policy choices. Inter alia it ought to increase the available policy options.

Second, and more importantly, direct sequestration has the potential to change the basis of policy in relation to carbon pricing. I have previously commented on the weakness of traditional cost benefit analysis (CBA) in this context. CBA fails to provide a basis for a carbon price, and the failure is in large measure due to an impossible number of uncertainties (in climate, geographical and economic impact) to which probabilities cannot be assigned from any established base of knowledge. But if we have a clear way of putting a cost on CO₂ removal, then we have at least a first approximation to a “true” cost of CO₂ emissions. This might inter alia provide a better justification for effective carbon pricing, and even for global adoption of a “common” rate of carbon tax. It could be a much more hard-edged approach than complex negotiations over carbon trading schemes, which, as with the EU Emissions Trading Scheme, have so far failed to deliver adequate carbon prices.

These are obviously early days for direct extraction technologies, and we should avoid premature optimism, but this could be an important part of the geo-engineering landscape to watch.

---

[1] One of the reasons BECCS is controversial is that its justification requires careful analysis of the entire chain of processes involved, starting with the cultivation of the bio-crop and including any ecological or carbon related side effects, as well as consideration of the alternative land uses for food production or other purposes.

[2] Limits to scale might be imposed, for example, by the availability of other input chemicals to the extraction process. But the more serious limitations are likely to be on disposal of the CO₂ gas. A preferred route of extraction might be capture of the carbon in a solid and inert form, such as calcium carbonate, if this were possible.

EXISTENTIAL THREATS FROM CLIMATE CHANGE.

Tragic events in the UK in the last week, the Grenfell Tower fire, remind us of the dangers of not paying attention to readily identifiable risks, and avoiding action for the sake of relatively trivial cost savings. Although it is an issue on a much much longer fuse, there are many analogies that should apply to the way we approach the threat of climate change. It’s not a simplistic cost benefit analysis. It’s about possible risks to our survival, at least in the numbers and the style to which we are accustomed today. This means a sensible approach to the avoidance of catastrophic risk. It also means understanding the science, in this case some of the dynamics of climate.

Discussions in one of the recent BIEE climate policy seminars[1], taken with some of the references that I then pursued, touched on a number of general issues that I have sometimes touched on before in this blog, or which deserve repeat at regular intervals. One is the gross inadequacy of conventional approaches to justification of climate policy in terms of a traditional cost benefit analysis, sometimes grasped enthusiastically by second rate economists as if it were a raison d’etre of their trade. Another is the notion of “tipping points”, associated with particular catastrophic risks to climatic systems, and sometimes ridiculed by climate sceptics; these are essentially points where a small marginal change in one factor, eg temperature, can completely change the dynamics of a climate system. A third is the problem of finding a rational approach to risk uncertainty, and a fourth is the importance of irreversibility. And finally I discovered, buried in an under-reported section of an IPCC report, a simple illustration of why we might want to take seriously the aspiration, from the Paris agreement, for a 1.5^o C global warming target.

Let’s start with the illustration, which is a chart showing the pattern of a likely relationship between temperature. The vertical axis is estimated long term sea level rise associated with a given increase in global temperature to a new equilibrium.

http://www.ipcc.ch/report/ar5/wg1/

Climate Change 2013: The Physical Science Basis. Chapter 13. Sea Level Change

The graph shows a step change in the long term sea level that starts as the global temperature rises. The step change occurs as global temperatures reach about 1.5^o C above pre-industrial levels, and adds about five metres of sea level. It is perhaps not entirely coincidence that this is the aspirational target from Paris COP21.

What the chart shows is actually a physical phenomenon that is very easy to explain. It is the melting of land ice, in this case the Greenland ice cap. Up to that point sea level rise is slower and due to other factors such as thermal expansion or glacier melt, as well as smaller land ice reductions. Once the ice has melted it will not reform quickly or easily even if temperature stabilises or falls slightly. In other words the change is irreversible. The change also changes the climate dynamics and accelerates global warming through a feedback effect, as water absorbs more heat than reflective ice cover.

This scale of sea rise, which threatens many if not most major cities, such as London and Shanghai, and countries such as Bangla Desh, as well as much of our most productive agricultural land, might be considered an existential threat to human survival, at least with a continuing population of 8 to 10 billion. Even if this probability were considered quite small, an assumption that is by no means obvious, it is one that most people, facing such a risk in their daily lives, would take a great deal of trouble to avoid. As the simple physics of heat tells us, melting is not an easily reversible process. Land ice melting on this scale would be a catastrophe from which there would be no easy escape.

This is also an where a traditional cost benefit analysis to public policy breaks down. It fails for a number of reasons.

First there is no means to measure the scale of what the costs of serious disruptive climate change might look like, in terms of forced mass migration of hundreds of millions of people, resource conflict, and the destruction of capital assets. Integrated assessment models of the type quoted in the Stern Review, however well intentioned, are simply not fit for this purpose. Second, cost benefit analysis is actually a very limited technique, suitable for the analysis of small incremental changes. It does not deal adequately with radical choices between wholly different paths to the future. Third, it takes no account of inequality. Hardships for poor people are valued less than minor inconveniences for the wealthy.

But most important of all, it depends on the ability to quantify everything, including uncertainty. This is acceptable when it is possible to assign a known probability distribution, but in this context, and many others, that is completely impossible.

This is a field where other professions have long had a more realistic approach. Dr David Hare, a past-President of the Institute and Faculty of Actuaries, puts it very well.

“Climate change is primarily a risk management problem – one of the most important goals of climate change policy should be to limit the probability of a very bad outcome to an acceptably small value.”

The task then is not to find an arbitrary value for a carbon tax, although such a tax is a useful measure. It is to make sure, above all, that a safe policy objective is achieved. 1.5^o C, far from being idealistic, may even prove to have been a dangerously conservative target.

---

[1] I shall not be specific as these seminars meet under the Chatham House Rule and I prefer to minimise the risk of accidentally ascribing an opinion to an identifiable individual.

PLENTY OF POLITICAL DRAMA IN THE UK AND THE US.

Stunned by the range and scale of extraordinary and dramatic events in the last few weeks, this blog has remained very quiet and is only now starting to recover. It will remain quiet and slightly less frequent over most of the summer as the author is also working on some substantial papers about low carbon issues.

.........................................................................................................................................

But it’s a good time to review quickly some recent events, in terms of their possible implications for energy and climate policy. Some of the themes may deserve a fuller treatment in due course. Some reflect on earlier postings.

Trump. The Trump comedy machine trundles on. Monty Python meets House of Cards is one popular characterisation of recent events (and not just with Trump or the US). But, as I commented earlier in relation to the Paris agreement, the damage of US withdrawal can be exaggerated. It will be limited both by growing appreciation within the US of climate issues, and by the increasing extent to which the rest of the world will simply ignore the US in the framing of its own policies.

The Middle East. Probably of more geopolitical significance are the strange diplomatic initiatives in relation to Saudi Arabia and Quatar. At the very least these risk adding fuel to the flames of conflicts that are already very terrible and will pose problems well beyond their own borders. These are very well explored by David Gardner in the FT.

The Saudis have long so mismanaged their energy resources as to have been forced to consider their own austerity programme, and on current prognostications for oil demand and prices their long term prospects must force some very substantial changes, not least in the very wasteful consumption of energy that has characterised much of the Middle East. We have long thought of the region mainly in terms of its role as a low cost intra-marginal oil producer, but consumption growth has been huge, and it deserves to be taken much more seriously in the broader context of how global adjustments and low carbon policies can be developed. We have to hope this will not be hindered by ill-considered diplomatic and military adventures on all sides.

UK. Bank of England forces financial institution stress tests in relation to climate change. This is another sign that widespread assumption of a low carbon future is gaining traction. Part of this is concern with the liabilities of insurance companies, in relation to some of the bigger risks anticipated from climate change, eg coastal flooding. But another of the Bank’s concerns is with the position of funds that have too much invested in companies that are going to lose out heavily if the world turns even more decisively against fossil fuels. Companies most at risk include coal, especially as the prospects for carbon capture appear to recede. Again this is an issue flagged in an early posting on this site.

And the UK election and Brexit. Direct implications for climate policy seem limited. There is no doubting the multiple close correlations and affinities between the fundamentalist free marketeers, the hard right Brexiters, the Trump camp and fossil fuel lobbies in the US, and refusal to accept the implications of climate science. Politicians like Redwood, Lawson, Trump himself, Farage and UKIP, Rees Mogg and Grayling, together with the small band of pro-Brexit economists, all fit the mould, and the correlations have been noted in earlier postings. But with too many internal battles over Brexit, and the relaxation of austerity,  any threats to UK climate policy, its 2050 legally binding targets or its commitment to Paris seem unlikely, for a host of reasons.

Where do we go on liberalised markets? Both major parties went into the election on a platform that included the prospect of price controls for the energy companies. This deserves a deeper analysis, perhaps, but surely marks the death knell of the liberalised market approach in the UK. The UK government, and most other European governments, intervene extensively in the energy sector.

TRUMP, MORE NONSENSE ON CLIMATE, AND THE ARGUMENTS MOVE ON

Apologies to readers for a longer than usual gap. This has been the result of travel commitments and the diversion of my time into writing a rather longer piece for another publisher.

The Trump caravan moves on. The recent G7 meetings are reported to have included tense conversations between Trump and other leaders on climate policies. Hitherto Trump’s lack of consistency on the subject has been encouraging, as campaign slogans promoting coal interests meet some wider global realities. And Trump’s unpredictability (to use a kind word) means that even if he eventually comes down on the anti-science side of the argument, the US position will carry less weight in the rest of the world and is less likely to undermine the Paris agreement.

However it is clear that the “refute the science” camp epitomised by climate sceptics such as Trump[1] and the UK’s own Nigel Lawson is increasingly in disarray. In recent years they have relied heavily on the cherry picking of global temperature statistics purporting to show a pause in “warming” since 1998, an unusually hot el Nino year. The statistical analysis was always laughable, but the last two years, coinciding with another el Nino, have driven the last nails into the coffin of this particular piece of sophistry and spurious argument.

The result is we now see the sceptics retreating to another line of defence, essentially that the outcome of increasing CO₂ might not be as bad as predicted and therefore might not justify “expensive” action in mitigation. Jonathan Chait reports one such line in the Daily Intelligencer of 1 May, picking up a column from the New York Times in which Bret Stephens, whom he describes as “a conservative refugee from the increasingly Trumpist WSJ”, argues that the certainty of climate science is overrated, while still admitting the reality of warming and the human influence on it.

This at least is progress of a sort. Pre-election Trump treated the science as one of the great hoaxes of all time, so at least there is some recognition of the science. And it is also true that the science is anything but certain in estimating the climatic impacts and their economic and social costs. However this argument, which is developed to suggest that we cannot afford to abandon or reduce our fossil fuel consumption, ignores the reality that the uncertainties over outcomes runs in both directions.

The problem is the implicit argument that the risk is one-sided.  Climate Shock, a 2015 book by two very serious economists, Wagner and Weitzman, argues that we pay too much attention to scientists’ best estimate of the “likely” global warming outturn. What should really concern us is possible underestimation of climate change. The best estimates are both dangerous and expensive.  But the more extreme but still plausible possibilities are terrifying, threatening human civilisation in any form to which we have become accustomed and almost certainly implying a massive involuntary reduction in population.

It is also worrying that the evidence hitherto is to suggest that scientists have if anything erred on the side of not appearing to be alarmist, and that their predictions have proved right, within a range of uncertainty, or have underestimated the warming that has actually occurred.[2]

We do not accept a 10%, or even 1%, chance of a fatal outcome when we take a flight.  Nor should we collectively accept such risks in forming our energy choices. Nor is the cost of effective action impossibly high (although it might become so if we wait too long). It is broadly assumed to be of the order of 1 to 2 percent of GDP, roughly speaking the equivalent of assuming we might reach a given standard of living inn 2050 instead of 2049. It is also, for individual economies, within the boundaries of impacts (on standard of living) brought about by short term fluctuations in the oil price, or by significant changes in government fiscal policies.

We should expect more dubious arguments along these lines from conservative commentators such as Stephens, Lawson, Trump and others. The ideological objective is small government, and fact and logic are twisted to reach the desired political conclusion.

---

[1] Trump, like our own Daily Mail climate science specialist Melanie Phillips, has form on matters scientific, having got into deep water on the subject of vaccination and autism. This is another area where the promotion of absurd and indefensible positions has caused huge social damage, but this blog confines itself mainly to energy matters.

[2] Climate change prediction: Erring on the side of least drama.  Brysse, Oreskes, O’Reilly, and Oppenheimer. Global Environmental Change. Volume 23, Issue 1. February 2013

SHOCK. HORROR. THIS IS A GOVERNMENT THAT DOES NOT BELIEVE IN FREE MARKETS.

Has May pinched Corbyn’s policies (or at least Ed Miliband’s)?

I commented a short while ago  (on 25^th April) on the very different treatments handed out to the idea of energy retail price caps, depending on whether they were proposed by Labour or Conservative administrations. To recall the discussion.

[2015]. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [2017] … on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]

This was a timely posting. The FT reports today as follows.     Theresa May said during the Conservative party conference in October last year that she was planning to take action on high bills. Since then, the “big six” power companies have stopped trying to match or better the cheapest deals on the market, according to an analysis by price comparison website uSwitch.

So far this looks like first blood to the Daily Telegraph, as the big energy companies take pre-emptive action to raise prices or at least limit any pretence at aggressive competition. The FT also reports that: Iain Conn, chief executive of British Gas-owner Centrica, Britain’s biggest energy supplier to homes, has said there were people at the heart of the Tory government who “don’t believe in free markets”.  

Alternatively this could be interpreted simply as a recognition that in this particular industry, the principles of free markets and competition are beset by so many sources of market failure that some retreat from neo-liberal ideology was inevitable. An energy industry counterpoint came from Paul Massara, former chief executive of Npower, who said free market competition had not so far encouraged the majority of households to switch to cheaper deals. “Free markets haven’t worked and therefore you need to do something. The question is what is the right solution?”  [again according to the FT]

Watch this space. There will be many even more significant battles ahead within the Tory party around the broader questions of markets and “working for everyone”. But, I suspect, they will not be of great prominence in this election campaign.