Thursday, July 11, 2019

Barry Brill: 2050 - Costs vs Benefits


The fundamental question raised by the 2050 zero carbon proposal can be put simply: Is selecting that year worth the price? Or, is the proposed cure worse than the disease?

Governments and corporations everywhere answer similar questions all the time by cost-benefit analyses. But climate policy is an exception. No cost-benefit study of any kind is included in the 160-page Regulatory Impact Statement (RIS) that accompanies the ‘Zero Carbon Bill’. 

We have a Government modelling estimate that the economic losses will amount to a massive $300 billion or about $20,000 per household. Is that a fair share?  Our current gross emissions are about 28 metric tonnes per household, so the modelled price might be slightly over $1,000 for each tonne reduced. Is that reasonable value for money? Are more cost-effective methods available?

But the RIS says it is not possible to identify any quantifiable benefits at all. When we achieve net zero emissions, that is an improvement in the global position of only about 0.1%, which could have no discernible impact on the future global mean surface temperature (GMST).

No NZ Climate Benefits

The Ministry’s Consultation Document strongly implied that New Zealand regions would experience less future warming (and therefore avoid weather extremes) if the country could achieve the ‘Zero Carbon’ target. This implication was wholly unwarranted. Future average temperatures within New Zealand are not related in any way to this county’s own greenhouse gas emissions.

New Zealand’s efforts cannot deliver any discernible global benefits either. See the science discussion in the Annexe.

2050 not science-driven

The selection of the year 2050 for decarbonisation is a purely political choice and could have no  relationship to any estimation of its likely effects on future temperatures either at home or abroad. Rather, its stated driving force is “leadership at home and abroad”.

Both the Explanatory Note and the RIS recognize that no climate effects could arise from New Zealand choosing 2050 over any later date. This decision cannot impact on the physical world – only on the world of marketing and spin.

This is the only conclusion to be drawn from the official National Interest Analysis regarding the Paris Agreement which was approved by all Parliamentary parties in 2016, and relies upon international comity as the reason for New Zealand to volunteer an emissions reduction. This formal document is undoubtedly correct in stating that we “cannot be seen to free-ride on climate change”. But that is the only rational and legitimate ground for taking domestic climate action.

It is the same reasoning that appears in the climate change policy in the Labour Party 2017 manifesto: “New Zealand must do its part, along with the rest of the world, in reducing climate pollution. It is not good enough to say we are too small to matter… Kiwis are not shirkers.”

Few would disagree that the drive should be to do our fair share – not to re-interpret the IPCC or the Paris Agreement and not to lead the world.
In any event, setting targets is little more than bluster. Leading climate scientist David Frame says:

The real issue for New Zealand is not the targets, but achieving the targets. It is not ambition we lack, but action. Current policy will not get us to the targets we have set. This is also the case in other developed countries. The answer is to work on the policy, not to fiddle with the targets.”

Appetite for pain

Professor Frame goes on to dismiss the climate activists who criticise the ‘inadequacy’ of every target and every policy in every country at all times:
“These assessments are a “view from nowhere” in the sense they are made by people who do not have to consider the trade-offs necessary for decarbonisation to take place. They do not need to worry about economic performance, social cohesion and the other things that actually form the main parts of what we expect from governments in liberal democracies.”

The fact is that every government intervention in the cause of climate change causes inefficiencies and distortions in our economic fabric which reduces our standards of living and our quality of life. Climate policy is all dark clouds and there is no silver lining. It is all pain and no gain for New Zealand, except to the narrow extent that we may be tangibly incentivising and supporting our trading partners in their efforts to reduce a potential planetary threat.

Activists use the euphemism “ambition” to describe the estimated upper limit to any country’s appetite for climate policy pain. Endless Pew surveys have established that most people will support climate action but only up to the point where the cost to their own households exceeds US$10 per month (call that about NZ$200 per year). The New Zealand ETS already exceeds that general worldwide pain threshold by about 4-5 times.

There is no reason to believe that middle New Zealand will be prepared to lead the world in climate masochism. Average kiwis did not participate in the Government’s misleading consultation process in 2018 and certainly did not know that (in the words of a former chief economist of the Reserve Bank) :

“I would be surprised if ever before in history a democratic government has consulted on proposals to reduce the material wellbeing of its own people by up to 25 per cent.” 

Emission drivers

Predictions of future temperature changes rely crucially on scenarios, and the IPCC has made considerable use of the Kaya Identity – which states that emission levels are largely driven by population x GDP per capita x energy intensity x carbon footprint of energy. 

By the standards of the developed world, New Zealand’s population has rocketed over the past decade, and we are also said to have enjoyed a ‘rock star’ economy. It could be expected from those statistics  that our energy-related emissions would have gone through the roof. But that has not happened because our energy intensity has been steadily improving – as a result of cumulative small changes in many relevant technologies. In fact, the country’s overall energy intensity (units of energy per unit of GDP) has been consistently declining for over 30 years.

We could achieve high targets, with relatively low pain levels (for current residents), by cutting off the net  inflow of migrants and encouraging net outward migration. Or we could simply induce an endless  economic recession by changing the Reserve Bank’s policy targets to include emissions reduction[1] – if higher ‘ambition’ is required. Or perhaps reduce all speed limits to 20kph or ration domestic flying, or put an import ban on cellphones or cars, or … etc.

Do Taxes work?

The mainstream view of economists is that the least inefficient way of inducing a decrease in CO2 emissions is to “put a price on carbon”. The desired “price” may be induced by either a carbon tax or an ETS (essentiality a tax with post-hoc trading rights) and should be at a common level worldwide. Thereafter, normal market forces will operate to allocate all global mitigation investment into the geographic and sectoral areas which will give the best returns for the minimum welfare loss.

This pipe-dream is politically impossible. Developing countries fiercely protest their right to raise the standard of living of their respective populations to the levels long enjoyed by the developed nations, who have already exploited most of the earth’s “carbon budget”. Developed countries such as USA, Australia and Japan (and perhaps Canada, in the coming year) have debated but firmly rejected various versions of such schemes.

Instead, carbon taxes and ETS imposts are patchily applied around the world in sundry cities, states and nations at diverse scales and scopes. Only Europe has a supra-national ETS. Only  New Zealand has a national ETS.

We have harsh taxes on motor spirits[2] and an ETS take of nearly $900 million in the 2019 budget. This is all highly opportunistic and devoid of principle, with the government recently establishing a formal enquiry with the aim of reducing the retail petrol price.

While the economic assumption is that demand is always suppressed by price, the empirical evidence is that volumes were not materially reduced when crude oil was priced at US$150 per barrel and petrol retailed at $3 per litre. In the case of tobacco as well, harsh taxes have clearly failed to eliminate demand.

In brief, the New Zealand experience has been that “sin taxes” have plainly caused hardship but have failed to bring about significant behavioral change.

Regressive effects

Raising carbon prices is one of the most regressive instruments imaginable. Raising the price of diesel, for example, elevates the price of food and shelter and all the other components of the cost of living. It is “a great big new tax on everything” which raises the CPI and eventually the OCR. These basics consume a much greater share of the incomes of beneficiaries (whose benefits are no longer CPI-linked) than those of the better-off.

The price-elasticity of petrol is extremely high and the only people who will stop (or significantly reduce) driving are those who simply cannot afford to buy the extra litre. Better-off people just curse and pay the elevated price. This ineluctable fact is what caused the NZIER modellers to find that people in the bottom two income quintiles will be hit six times as hard as people in the top quintile. Such a disparity could never be acceptable in a traditionally egalitarian country.

Aware of the high potential for regressive policies, particularly in developing countries, the UNFCCC (COP21) was at pains to include a caveat within the Paris Climate Agreement itself. The operative clause (Article 2) is governed by the following proviso:

This agreement …aims to strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty”.   [emphasis added]

The eradication of child poverty is a shared goal of all the current Parliamentary parties in New Zealand but is obviously quite incompatible with an ‘ambitious’ use of taxes to achieve a pain-filled climate goal.

Technology
         
Sustainable reduction of emissions will only be achieved by the development and early adoption of new/improved technologies on both the supply and demand sides of relevant markets, particularly the energy market.

The strongest argument against choosing an earlier decarbonisation date than envisaged by the Paris Agreement is that numerous technological solutions assists and solutions will undoubtedly continue to improve and reduce in price as time passes. As long ago as 2005, a multi-party Select Committee of the UK House of Lords unanimously agreed that the cost of reducing emissions would be directly proportionate to the speed of doing so.

The main conclusion of the well-reasoned report of that authoritative Committee was that international negotiators should be weaned away from excessive reliance on the "targets and penalties" approach embodied in the Kyoto Protocol. They concluded that “focussing on emissions targets will fail” and recommended that “Kyoto-plus should focus on technology and R & D”.

This view is further supported in “Why subsidise more congestion?” and The climate scare could be gone by 2030”

In “Energy solution hinges on better technology”, a recent thought-provoking article in ‘The Australian’, economist Bjorn Lomborg notes: 

“Yet humanity has actually never experienced an “energy transition” — a shift from one set of energy sources to another set. Rather, we have added more and more.”

And:
“Politicians across the world happily promise to emit net zero CO2 by 2050, knowing they will be long retired from politics when those vows are broken. Achieving this will be almost impossibly expensive, likely provoking “yellow vest” street riots long before their conclusion.

After New Zealand made its 2050 zero emissions promise, the government commissioned a report on the costs. This found that achieving this goal in the most cost-effective manner (which strains credulity because policy seldom if ever manages to be cost efficient) would cost more than last year’s entire national budget on social security, welfare, health, education, police, courts, defence, environment and every other part of government combined. Each and every year.”

Conclusion

The onus of showing that 2050 is the best target year lies upon its proponents. So far, the evidence is totally lacking.

Annexe :  Global Temperature Impacts

To begin assessing the global benefit from any climate policy it is necessary to identify the temperature consequences of two hypothetical cases – the first being a ‘Business as Usual’ (BAU) scenario, which provides the counterfactual to the second scenario in which emissions are reduced by the relevant policy. ‘Temperature’ means the GMST (measured in air just above all land and ocean surfaces).

There are endless opinions on scientific, economic and other complexities contributing to the recognition and attribution of human-driven GMST changes and/or the welfare impacts of such changes. However, for New Zealand legislative purposes, the only tenable approach is to simply adhere to the findings of the Assessment Reports of the UN Intergovernmental Panel on Climate Change (IPCC), the Fifth[3] of which (AR5) was signed off on behalf of the New Zealand Government in Stockholm, Sweden, during September 2013.

AR5 offers a table of possible BAU temperature levels by 2050 and 2100 respectively, which range from beneficial to dangerous, but offer no probabilities. Users are left to make their own subjective[4] selections, on a “believed most likely” basis, of two key inputs:

     an equilibrium climate sensitivity (ECS)[5] within the range 1.5°-4.5°C

     a future emissions scenario (RCP) within the forcing range 2.6 –8.5

An important third imponderable is the likely future impact of natural internal variability[6] or natural forcing (eg volcanoes). Although WG1 is silent on this point, it does find[7] that “more than half of the observed warming” in the period 1951-2010 was human-caused – by a combination of greenhouse emissions and land use changes. That leaves the possibility that up to half the 0.65°C that was observed (ie about 0.3°C) could have been natural.

Activists and the media generally choose a dramatic “worst case” approach – despite the fact that the estimated mathematical probability of that combination is much lower than the onset of either the next glaciation or a ‘little ice age’.

Then there is the complex question of quantifying the damage that could be avoided if the major future emitters – China, India, USA, EU, and Russia – were able to achieve ‘zero carbon’. That is even more complex. Recent Nobel prizewinner William Nordhaus says that “from the standpoint of economic rationality” it is optimal to keep warming the planet to about 3.5°C over preindustrial levels.  Professor Richard Tol’s 2009 paper found that all published research found initial economic welfare from climate change and was “in sharp contrast to the urgency of the public debate and the proposed expenditure on greenhouse gas emission reduction”.  

Despite the economists, the objective of the UNFCCC Paris Agreement is to restrain GMST from rising by more than 2°C above its calculated level of 14.10°±1.00°C in about 1875. It has risen to 14.97°C over the last 140 years – an average of only 0.06°C/decade.

During the past half century, GMST has been rising at an average rate of about 0.13°C/decade – and, if this trend is projected forward, the 16.10°C limit would not be reached before 2100. But there is widespread concern that exponential growth[8] in annual global emissions might accelerate this trend to cause the remaining “headroom” of about 1.13°C to be dissipated much earlier.    

The Paris Agreement, relying upon voluntary reductions by 2030, could potentially reduce the ‘business as usual’ (BAU) GMST of 2100 by about 0.2°C in aggregate, as long as none of the reductions are achieved by ‘carbon leakage’. This rather modest contribution has been accepted, and indeed welcomed, by the international community.




[1] As seems to be favored by the current Governor
[2] Approximately $1 per litre of petrol, or 50% of the retail price.
[3] Although Working Group 1 (WG1) of the Sixth Assessment Report is now in draft, it is not due to be published until April 2022.
[4] IPCC/AR5/WG1 is unable to offer an opinion on either input, but notes that averaging is not an option. The range of possible 2050 and 2100 temperature outcomes is critically dependent on each.
[5] The climate sensitivity metric required for application of the Table is known as the ‘Transient Climate Response’ (TCR)
[6] Such as the El Nino Southern Oscillation (ENSO), the Pacific Decadal Oscillation (PDO), the Atlantic Multi-decadal Oscillation (AMO), solar cycles, ocean thermocline changes, etc
[7] This was an ‘expert judgment’. I discuss elsewhere the lack of relevant evidence. It is important to note that there is no consensus or even majority view between climate scientists on these 3 confounding issues.
[8] CO2 accumulates in the atmosphere over long periods. However, incremental atmospheric CO2 has an ever-diminishing warming impact on a logarithmic scale, as ‘saturation’ is approached.

Barry Brill is a lawyer and former Minister of Energy, who Chairs the New Zealand Climate Science Coalition. 

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