Archive for January, 2015

Can we address climate change fairly cheaply?

Saturday, January 31st, 2015


Several people, including Paul Krugman in Could Fighting Global Warming Be Cheap and Free? have made assertions such as,

This just in: Saving the planet would be cheap; it might even be free. But will anyone believe the good news?

Here is a look at these claims, what they tell us, and what they don’t.

Bottom line

smog in India
Smog in India and other countries has grown dramatically in recent years, and so have the numbers of dead and ill.

Air pollution and mind-deadening commutes harm us as individuals. They also contribute to decreased economic productivity. Around the world, millions die yearly from outdoor air pollution, and coal in particular, damages individuals and economies.

Two studies from 2014 say that the costs of addressing climate change are not so large if we count co-benefits: when we reduce carbon dioxide pollution, we almost always reduce air pollution, for a healthier population. This is a point that Intergovernmental Panel on Climate Change has made in their reports on mitigation (reducing the sources or increasing the sinks for the causes of climate change). If we end direct subsidies to fossil fuels (mostly in the developing world), and indirect subsidies (such as our health and agriculture yield), then the extra costs to address climate change are fairly low.

The idea of co-benefits is crucial, that we could and should do a lot better, that addressing air pollution is in countries’ self-interest (a healthier population is a more productive population), are messages that we hope to hear more often.

That said, we pay to reduce greenhouse gases and other air pollution with higher energy bills, even if these reductions save us money, and transitions will be complicated. “Almost free” policies to address pollution add a price to energy of many tens of dollars/ton carbon dioxide.

First report, from the International Monetary Fund

A working paper of the International Monetary Fund says 3 million people die yearly from coal (some due to indoor air pollution), and 3.7 million die yearly from outdoor air pollution. Air pollution other than greenhouse gases, and congestion from incorrectly priced fuels, cause an extra $57.50 in damage per ton of carbon dioxide, even though it is not the CO2 doing the damage. IMF recommends eliminating fossil fuel subsidies, and adding a carbon price in the top 20 emitting countries. Prices would vary, from more than $80/ton in Poland, where CO2 comes disproportionately from coal and public exposure is high, to less than $20 in South Africa and Australia, where exposure is less. (South African coal plants are on the coast, so damages are lower although coal use per capita is higher than in the United States.) In the U.S., the tax would be $36. Note: each $10/ton CO2 cost adds about 1 cent/kWh to the portion of electricity from coal, half that to the portion from natural gas, and 9 cents/gallon to gasoline.

IMF would tax all fossil fuels independent of their effects on air pollution, so the tax on natural gas would be half that for coal, even though air pollution is much lower. Presumably IMF prefers this method because assessing air pollution damage caused by each power plant is a challenge. Some of the avoided deaths come from fewer automobile accidents as driving costs rise. Benefits include reduced traffic congestion and road damage. About half of the savings is due to a tax on fossil fuels (directly via tax, or indirectly via cap and trade) displacing less efficient taxes, such as income, sales, and payroll taxes.

Health benefits would be higher in the developing world. Additionally, fossil fuel subsidies are mostly in the developing world, and mostly in energy exporting nations, where they do immense economic damage. Transition costs would be higher in most of the developing world as well.

Second report, from Global Commission on the Economy and Climate

The Global Commission on the Economy and Climate, a group of political and financial leaders from around the world, analyzed co-benefits in Better Growth, Better Climate—The New Climate Economy Report. The Executive Summary stresses the importance of acting immediately, as we can be locked in for decades to decisions made today. Over the next 15 years, $90 trillion will be invested, and population will grow another 500 million, so delay will be costly. They emphasize that all countries, not just the wealthy, can benefit from more holistic decision-making:

The report’s conclusion is that countries at all levels of income now have the opportunity to build lasting economic growth at the same time as reducing the immense risks of climate change. This is made possible by structural and technological changes unfolding in the global economy and opportunities for greater economic efficiency. The capital for the necessary investments is available, and the potential for innovation is vast. What is needed is strong political leadership and credible, consistent policies.

Some caveats

Neither report discusses, so far as I can see, the following:

• How many human lives could be saved by cheaper methods, such as scrubbers, rather than focusing on improving human health through solutions which have co-benefits for the climate? Additionally, natural gas contributes half as much to global warming as coal, but natural gas air pollution kills many fewer. Benefits to the climate are about equal in switching from coal to natural gas, and from natural gas to nuclear, but most of the co-benefits occur with the switch away from coal.

• How will current world leaders continue in power while eliminating fossil fuel subsidies, which have transition costs in addition to political opposition? Finding a way to help the poorest, who get a relatively small amount of the subsidy, eases the transition. A number of countries have seen turmoil when the attempt has been made. (Note: I wish well all those going through the transition, and hope that they make rapid progress!)

Another view—Stavins says the economics of addressing climate change is “difficult, not impossible”, and the politics are even more challenging

Robert Stavins, a lead author on three IPCC reports, expressed the idea of cost much differently in a NY Times op-ed, Climate Realities. He doesn’t address co-benefits, but says that addressing climate change will be difficult and expensive, and may even be very, very expensive:

Two points are important to understand if we’re going to be serious about attacking this problem.

One, it will be costly. An economic assessment might be “difficult, but not impossible.” And two, things become more challenging when we move from the economics to the politics.

Doing what is necessary to achieve the United Nations’ target for reducing emissions would reduce economic growth by about 0.06 percent annually from now through 2100, according to the I.P.C.C. That sounds trivial, but by the end of the century it means a 5 percent loss of worldwide economic activity per year.

And this cost projection assumes optimal conditions — the immediate implementation of a common global price or tax on carbon dioxide emissions, a significant expansion of nuclear power and the advent and wide use of new, low-cost technologies to control emissions and provide cleaner sources of energy.

If the new technologies we hope will be available aren’t, like one that would enable the capture and storage of carbon emissions from power plants, the cost estimates more than double.

Then there are the politics, which are driven by two fundamental facts.

First, greenhouse gases mix globally in the atmosphere, and so damages are spread around the world, regardless of where the gases were emitted. Thus, any country taking action incurs the costs, but the benefits are distributed globally. This presents a classic free-rider problem: It is in the economic self-interest of virtually no country to take unilateral action, and each can reap the benefits of any countries that do act. This is why international cooperation is essential.

Second, some of these heat-trapping gases — in particular, carbon dioxide — remain in the atmosphere for centuries, so even if we were to rapidly reduce emissions, the problem would not be solved immediately. Even the most aggressive efforts will take time to ramp up.

These realities — the global nature and persistence of the problem — present fundamental geopolitical challenges.

Andy Revkin from Dot Earth

Revkin from the NY Times quotes Dave Roberts in A Climate Hawk Separates Energy Thought Experiments from Road Maps, while saying that a lot can go wrong between the figuring of the costs and the actual expenditures, and it is quite reasonable to expect they will be more expensive than IPCC estimates.

It’s great to have these studies in our back pocket, as they refute the conservative mantra that a clean-energy transition is impossible. It is possible. But possible is a long way from practical or likely, and farther yet from “cheap” or “easy.” Let’s not fool ourselves about the huge task ahead.

My understanding of IPCC’s report on mitigation

There are two big numbers to pay attention to when we look at the cost of mitigation. (The costs of adaptation also rise rapidly with failure to rein in greenhouse gas emissions.)

First, many economists assume that world GDP continues to rise perhaps 3% per year through the end of the century. The assumption that GDP continues to rise in a changing climate, or that it continues to increase at a good rate, may be incorrect, according to some prominent economists. If economic growth falls a modest 1%, from 3% to 2%, then the time for GDP to double rises from 23 years to 35 years.

The second is the one discussed in all of the reports and articles above, actual expenditures. If we increase how much we pay out to mitigate global warming by 0.06%/year, then GDP still grows by 2.9%/year (if the 3%/year is valid). Economists have been assuming that a 5% reduction in 2100 means only that we reach the 2100 GDP in 2102 instead. It appears that some are now considering that the combination of reduced rate of GDP growth, possibly even negative growth, and greater costs than expected may mean that mitigation in 2100 is a hefty portion of the GDP.

IPCC says that costs to mitigate climate change this century will reach 5% of the GDP (forever) by the end of the century if all of these come to pass:
• GDP grows as fast as predicted so that the denominator used in calculating percent is large.
• We do everything right, such as adding a steep cost on greenhouse gas emissions everywhere, now, and increase energy research and development by a lot (e.g., a factor of 3 in the U.S.).
• Technology improvements come as rapidly as hoped for all sources of energy and efficiency, especially carbon capture and storage.
• Scientists are right about the amount of mitigation needed.

There are a number of ways that we can assure that the cost of mitigation doubles, or worse. Some will be discussed in the next two posts in the series.

Decades of delay in addressing climate change is costly:
• Adaptation costs are already higher today because of delay, and will be worse tomorrow.
• We will less wealthy in the future. The World Bank has issued a number of reports warning that a Warmer World Will Keep Millions of People Trapped in Poverty.
• Mitigation costs rise with delay—rather than implementing changes fairly rapidly, they need to be added much faster.

Economists do not doubt that the costs of living with change that we do little to prevent would be much larger. However, in discussing the costs of climate mitigation, even counting co-benefits, we may not want to use the term, cheap.

The series:
Fossil Fuel Subsidies
• Can we address climate change fairly cheaply?
Why add a cost to GHG instead of subsidizing renewables?
Tax or cap and trade?

Fossil fuel subsidies

Wednesday, January 28th, 2015

This is the first in a series of posts on the costs of addressing (or failing to address) global warming, and which policy tools work best: subsidies to other energy sources? tax? cap and trade? Writers frequently refer to fossil fuel subsidies, and I wondered how large they are. I begin with this, because if fossil fuels are not highly subsidized, either through direct subsidies or failure to require polluter to pay, there are no market distortions that need to be addressed.

[Notes: A market distortion is defined to be a situation where the price of the commodity does not make sense—it is higher or lower than it should be, so that decisions people make do not include full knowledge of benefits or damage. This is discussed in more detail below.

[People often leap to defend fossil fuel subsidies without checking whether their particular concern is addressed in policy solutions. These solutions will be discussed in coming posts.]

Bottom line

Largest subsidies: not requiring polluters to pay for air pollution ($1.6+ trillion/year) and climate change ($1.4 trillion+++++/year and growing). These are more commonly called externalities, costs or benefits going to those who did not pay for them.

Much lower are consumption subsidies ($400 billion), which lower consumer prices for gasoline, electricity, etc.

Lower yet are productions subsidies, which reduce costs for energy producers (perhaps $100 billion).

These subsidies average more than $500/year for every person on Earth. Those who use more fossil fuel energy receive more subsidies.

Production subsidies

Good statistics on production subsidies, which partially offset industry losses or costs, don’t exist.

To give an idea of their magnitude, Joseph Aldy asserts that almost $5 billion per year in US subsidies to fossil fuel producers, mostly oil and gas, are a waste of money. The Global Subsidies Initiative estimates world production subsidies may total $100 billion/year.

Consumption subsidies

Consumption subsidies reduce consumer prices. In Venezuela, gasoline is sold for 6 cents/gallon. In Saudi Arabia, oil is made available for domestic use, including electricity production, at under $15/barrel. In both Venezuela and Saudi Arabia, more than 3/4 of the price of fossil fuel consumption is subsidized.

International Energy Agency provides an analysis of fossil fuel subsidies, which disproportionately go to the rich and middle class, drain state budgets, increase pollution, distort markets, encourage waste, and discourage investment in methods to reduce energy use. Subsidies increased by $110 billion between 2009 and 2010, to $409 billion, to keep up with rapidly rising energy prices. IEA says consumption subsidies may reach $660 billion in 2020.

Subsidies are especially high in countries which export fossil fuels, more than $325 billion of the 2010 subsidies. Importers see their budgets suffer, and exporters see a valuable resource depleted more rapidly.

An IEA map shows consumption subsidies around the world—they are found in most of Asia, a good portion of Central and South America, and North Africa. These 10 countries subsidize the majority of the price of fossil fuels (percents vary with the price):

South America
• Ecuador (52%)
• Venezuela (82%)

• Algeria (57%)
• Egypt (54%)
• Libya (80%)

• Bangladesh (51%)
• Iran (74%)
• Iraq (62%)
• Saudi Arabia (79%)
• Uzbekistan (61%)

Pollution subsidies for global warming—polluter isn’t paying
climate risks are higher than estimated because they are erratic
Climate risks may be higher than estimated because they are erratic

Another market distortion occurs when we don’t include the costs of global warming, currently estimated at $37/ton carbon dioxide, $41/metric ton, for pollution emitted today. All agree the cost of keeping temperature increase manageable will rise.

This market distortion is called an externality, because the cost is external to the price. It effectively acts as a subsidy, with the purchaser paying far less than the actual cost.

[Notes: there is disagreement about the $41/ton CO2 estimate. A number of prominent economists feel it should be higher because economic models are insufficient:
• History tells us transitions will not be as smooth as economists predict.
• Productivity, productivity growth, and the value of buildings, farms, and infrastructure will decline. Additionally, threats from major conflict and societal and economic collapse are not included in current economic models.
• Ecosystems will collapse, making them a more valuable commodity.
• Economists explicitly discount the future more than scientists, often discounting it at a constant rate, even though we as individuals see more difference between today and a year from now, than between 20 and 21 years from now; scientists point out that this method discounts almost entirely the costs of global warming in a few decades, no matter how high.

[A recent analysis examines only the effect of the slowdown in economic growth and produces an estimate of social cost of carbon dioxide which is several times higher than $41/ton. International Energy Agency suggests a $46/ton CO2 cost in 2020, rising rapidly to $160 in 2050.]

In 2013, the world consumed 33 billion barrels of oil, releasing 0.43 metric ton carbon dioxide per barrel oil. The subsidy to polluters who use oil is

$41/ton CO2 x 0.43 ton CO2/barrel x 33 billion barrels/year = $600 billion/year

In 2013, the world consumed 7.8 billion metric tons of coal, each releasing 2 tons of CO2/ton of coal. The subsidy to polluters who use coal is

$41/ton CO2 x 2 tons CO2/ton coal x 7.8 billion tons coal = $600 billion/year.

In 2013, the world consumed 3,300 billion cubic meters, 120,000 billion cubic feet, of natural gas. Each billion cu ft produces 54,400 tons CO2. The subsidy to polluters who use natural gas is

$41/ton CO2 x 54.4 million tons CO2/billion cu ft x 120,000 billion cu ft = $250 billion

These total over $1.4 trillion.

Ignored in these calculations are significant contributions from methane (natural gas), black carbon, and other climate forcings.

Pollution subsidies for air pollution other than those causing global warming—polluter isn’t paying

Air pollution
Air pollution, indoor and outdoor, kills 7 million annually, according to World Health Organization.

A working paper from the International Monetary Fund looks at the top 20 CO2 emitting nations, responsible for 79% of world greenhouse gas emissions. These countries emitted 27.1 billion tons of CO2 in 2012. IMF says in these countries, air pollution other than greenhouse gases, and congestion from incorrectly priced fuels, cause an extra $57.50 in damage per ton of carbon dioxide, although the damage is not from the CO2.

$57.50/ton CO2 x 27.1 billion tons = $1.6 trillion

In 2013, 33 billion tons of CO2 were emitted from fossil fuels and cement, so even assuming lower pollution in other countries, subsidies due to polluters not paying the cost of their air pollution is likely higher.

Pollution subsidies are real market distortions

Poor countries are harmed when energy use is subsidized. The rich use more energy and get more benefit from the subsidies. The result is that in poor countries, other important needs of society, such as education, are shortchanged or even ignored. Once these subsidies are in place, it is hard to convince people to give them up since they look on them as a right.

People I talk to understand that direct consumptions subsidies harm countries, but say they cannot see that pollution subsidies are in any way unfair. They agree that the cost of pollution from fossil fuels has been estimated at $41 a ton, just for climate change. However, they say, too, this is not the real cost since it fails to take into account the benefits of cheap fossil fuel to society.

Unfortunately, failing to make the polluter pay exacts a high cost on society. The damage done by the polluter (without the polluter having to pay) has to be seen as a subsidy because in an undistorted market (where all costs are taken into account), the polluter pays for the cost of the damage along with the other costs of energy. In today’s world, climate change and air pollution affect people’s health and lives, and cost society. The costs can also be seen in increased costs to agriculture because of decreased yields due to floods and drought. There are other definite costs: costs when buildings suffer damage from sea level rise, storm surges and floods; costs when we have to take steps to protect ourselves from rapid climate changes; coats when we have to deal with the results of permafrost melt; costs when land loses value because of climate change. Economists may limit their assessment to the near future, but the damage we do today will continue to cost future societies for many thousands of years.

People use the price of fossil fuels in determining how much to buy, and they are priced too low, so we buy more than makes market sense. I have heard a number of economists call improperly priced fossil fuels “the greatest market failure ever”. Nicolas Stern says this as well,

The problem of climate change involves a fundamental failure of markets: those who damage others by emitting greenhouse gases generally do not pay…Climate change is a result of the greatest market failure the world has seen.

The series
• Fossil Fuel Subsidies
Can we address climate change fairly cheaply?
Why add a cost to GHG instead of subsidizing renewables?
• Tax or cap and trade?