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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Markets are the way to beat climate change

Written by Tim Worstall | Tuesday 01 April 2014

So we've been treated to the latest installment of climate science from the IPCC. And as they say, it's vitally important that we have well functioning markets to deal with this. Of course, we need well functioning markets to deal with anything but here, right from the horses mouth (in Chapter 10, here) is what they say about markets:

Well-functioning markets provide an additional mechanism for adaptation and thus tend to reduce negative impacts and increase positive ones for any specific sector or country (high agreement, medium evidence). The impacts of climate on one sector of the economy of one country in turn affect other sectors and other countries though product and input markets. Markets increase overall welfare, but not necessarily welfare in every sector and country.

And as they say in more detail in 10.9:

Computable general equilibrium models have long been used to study the wider economic implications of changes in crop yields (Kane et al., 1992). (Yates and Strzepek, 1998) show for instance that the impact of a reduced flow of the Nile on the economy of Egypt is much more severe without international trade than with, because trade would allow Egypt to focus on water-extensive production for export and import its food.

Yes, they say that international trade, even or especially in food, is one of the vital ways in which we can deal with this problem.

That is, that part of the solution to climate change is international trade and markets: you know, basically the neoliberal world order.

Yes, OK, believe the science or not about the effect of emissions as you will. But don't let go of this point that I've highlighted above. Even if all of what the scientists tell us about the effect of emissions on anything at all is correct this still means that the people who tell us we must have local food security, that we must become more self-reliant, those who tell us we must abandon the market and plan matters, they are still wrong!

As I once wrote a whole book about the solution to climate change is neoliberal globalisation plus a carbon tax. This latest report from the IPCC is saying exactly the same thing. No, not prescient of me, I just read the previous reports where they've been saying exactly the same thing all along. And don't let anyone tell you different.

(Yes, I know the date of publication of this piece. No, it ain't)

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A very important point about climate change

Written by Tim Worstall | Saturday 29 March 2014

As you all know I'm boringly mainstream in my views over climate change. The scientists tell us that we've got to do something, the economists that that something is a carbon tax so I say, great, let's have a carbon tax. And then we get information that rather changes this so far sterile debate:

It puts the overall cost at less than 2% of GDP for a 2.5 degrees Centigrade (or 4.5 degrees Fahrenheit) temperature increase during this century. This is vastly less than the much heralded prediction of Lord Stern, who said climate change would cost 5%-20% of world GDP in his influential 2006 report for the British government.

Here's what Stern did to reach his figure, the one that leads to that $80 a tonne carbon tax. He took the worst possible economic forecast of the next century, the one leading to the highest emissions path. Then he made that worse with a couple of other assumptions. Then he invented (on this, possibly rightly) a new method of calculating net present values. And he assumed thatt here was high sensitivity of temperature to emissions.

However, the essential heart of his argument was correct. We don't want to undertake actions that are more costly now that the damage they save in the future. The limit to our attempts to prevent climate change, and yes he does lay this out, must be the scale of that future damage. To spend more now than that damage then would be nonsensical.

Which is where the new numbers coming from the IPCC come in. We now think that climate senstivity is lower than Stern assumed. Thus the actions that we should take to deter future costs must cost less now. That is, we should rationally be doing less now than we were before.

And the thing about this finding is that it is the boringly mainstream finding too. Which is interesting really, because there seem to be only a handful of people (Matt Ridley and myself being among them, he shouting it from a much taller soapbox of ourse) who even grasp this point, let alone actively promote it.

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An extremely strange argument from Nick Cohen

Written by Tim Worstall | Tuesday 25 March 2014

I both know and like Nick Cohen but it's also necessary to call out this extremely strange argument he made in The Observer. He seems to think that "climate change deniers" have won the war and that therefore all is doomed. When, actually, here in the UK at least, the government has already put in place the mainstream scientific remedy for the perils of climate change. We've actually already solved the problem:

If global warming is not new, it is urgent: a subject that should never be far from our thoughts. Yet within 24 hours of the American association's warning the British government's budget confirmed that it no longer wanted to fight it. David Cameron, who once promised that if you voted blue you would go green, now appoints Owen Paterson, a man who is not just ignorant of environmental science but proud of his ignorance, as his environment secretary. George Osborne, who once promised that his Treasury would be "at the heart of this historic fight against climate change", now gives billions in tax concessions to the oil and gas industry, cuts the funds for onshore wind farms and strips the Green Investment Bank of the ability to borrow and lend All of which is a long way of saying that the global warming deniers have won. And please, can I have no emails from bed-wetting kidults blubbing that you can't call us "global warming deniers " because "denier" makes us sound like "Holocaust deniers", and that means you are comparing us to Nazis? The evidence for man-made global warming is as final as the evidence of Auschwitz. No other word will do.

To take my standard position here: let's assume that the IPCC is correct and see where that assumption takes us. That assumption takes us to the standard economics of how to deal with an externality. Some version of either cap and trade or a Pigou Tax will solve the entire problem for us. And we even have things like the Stern Review (or, giving us slightly different numbers for a variety of reasons, the work of Richard Tol and William Nordhaus) telling us how much that carbon tax should be: $80 per tonne CO2-e.

So, if the climate change deniers, whoever they are, have won we should see that there's no cap and trade program and no carbon tax. But if we look up at the world that we actually inhabit, what is it that we do see? We see that the EU has a cap and trade programme. Emissions are limited, exactly as the standard economics of the problem tell us they should be. Here in the UK we also have a carbon tax: in power generation it's been done in the rather silly manner of a floor to the price for a carbon emissions permit but while this is inefficient it does do the job. We have raised taxes on petrol (the fuel duty escalator) by twice what that Stern calculation would tell us we ought to. We have Air Passenger Duty which is again above that Stern calculation. In fact, when you add up all of the various green taxes we already pay on emissions we find that we're considerably over the amount that Stern said would be the optimal Pigou Tax to solve the problem.

No, really: I get some very odd looks when I try to explain this to people but it is actually true. If we accept the IPCC, then again accept the Stern Review, we have already put in place all of the policies necessary to solve climate change as a problem according to both the IPCC and the Stern Review findings.

And I simply cannot work out at all how this is supposed to be a victory for climate change deniers.

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Some political ideas are simply stupid

Written by Tim Worstall | Saturday 15 March 2014

Sad to have to say it but some of the ideas that come from our current political class are just so stupid that they should have remained unuttered. Like this one that's just come from the green wing of the Lib Dems:

Liberal Democrats want to ban all conventional cars by 2040 and allow only electric and ultra-low emission vehicles on the roads. Every diesel and petrol car would be scrapped by then or earlier if there are enough technological advances. The extraordinary policy, contained in the Lib Dems’ ‘green manifesto’ launched this week, has the backing of senior figures including party president Tim Farron.

Let us start from the idea that the IPCC is correct, climate change is a problem that we need to do something about. Let us also, arguendo, agree that Lord Stern was correct as to what we should now do about matters. Excellent, what we should do is have a carbon tax equal to the social cost of the damage that emissions will do. And, here in the UK, we do indeed have a tax that performs that function for us. The fuel duty escalator was specifically brought in to "meet our Rio commitments" and it is now higher than that $80 a tonne CO2-e that Stern insisted that the tax should be. So, by the very arguments that have been used to persuade us that something must be done we are already doing that something.

Further, Stern (and all other economists) insist that this sole interference into the price system is all that we should do: and they also all make it very clear indeed that near random bureaucratic interference into that  price system fixing is going to be welfare destroying.

For here's what we're trying to do. We want to prevent people doing what causes more damage in the future than that thing produces benefits in the present. And we also want people to carry on doing things that produce greater benefits now than damage in that future. Because this is the method by which we maximise utility over time. Which is what the carbon tax achieves. People are priced out of doing things with greater costs than benefits while still enjoying those actions which produce greater benefit than cost.

Then along comes some nitwit who says that even though the use of petrol engines will produce greater benefits than costs we must still ban them. This must be the action that is being proposed here: if technology has advanced enough in 25 years time that non-petrol engines will provide greater utility than petrol ones then we will all naturally switch. If, on the other hand technology has not so advanced then the banning will be an obvious reduction in utility.

And that is why this is such a stupid proposal. If technology advances sufficiently then the ban is unnecessary. If it does not then the ban is simply making people poorer, that being the same statement as reducing utility.

What makes the proposal monstrously stupid is that we've already done everything we were supposed to do to beat climate change from fossil fuel powered vehicles. We've already got that carbon tax at over and above the social cost of emissions. Anyone who doesn't realise that just hasn't been paying attention to all that we're being told about climate change. And people who haven't been paying attention really shouldn't be proposing political policy, should they?

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Unwinding the Energiewende

Written by David Homer | Thursday 06 March 2014

The Energiewende or “energy transition” in Germany is a cautionary tale in many respects not least the unintended consequences of policy.

The German energy policy has been guided by three European directives. A target for reduction in carbon emissions, an effort to increase energy efficiency and critically a target for renewables in the energy mix. The desire to cut carbon emissions may be laudable if somewhat ineffective if China and India continue to increase their output of CO2, and a push to reduce energy efficiency seems sensible. However it is the third of the EU directives that has possibly led to most harm. A target for renewables in the energy mix has forced EU governments to pick and support the only technologies that are scalable within the present timescale, regardless of cost. So Germany has offered large subsidies for solar and wind which has led to a huge increase in German energy prices but then had to offer subsidies to German heavy industry to shield them from the increasing costs of power. But then these energy subsidies to industry have in turn been challenged by the EU. Furthermore, the German government’s stance on energy includes decommissioning its nuclear power stations. This combined with an increase in renewables which by their nature provide intermittent power and which have priority access to feed the grid has destabilized the energy market. Gas plants previously providing base load power are now only used to balance renewables making them uncompetitive and leading to the bizarre consequence that Germany is now building new lignite coal power stations to provide this back up generation capacity for its large renewable sector.

So the end result is that due to the skewed policy response caused by EU energy policy, Germany is locked into very heavily subsidized solar and wind production causing energy prices to rise whilst at the same time building more coal fired capacity to back up the intermittency of its large renewable sector which negates the central plank of EU policy to reduce carbon emissions. And the increasing price of energy is seeing large German energy users turning to the US to invest in new plant and further carbon leakage to the developing nations

All this is in stark contrast with the US.  Cheap and abundant shale gas has pushed much of the  dirtier coal energy production out of the energy mix, so without heavy market intervention the US has dramatically reduced its CO2 emissions whilst slashing its energy costs. And whilst once the energy debate in the EU was in part characterized by showing the world how policy directives could lead the way in effective CO2 reduction the result seems to prove the exact opposite.

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Are the floods down to global warming?

Written by Dr. Eamonn Butler | Friday 21 February 2014

Are this winter's extreme weather, with rain and floods across Southern England, down to global warming? If so, it's been going on for some time. Remember the devastating floods of 1953, or exceptionally cold winter of 1946, followed by an extremely hot summer. Or if you want a real (pre-industrial) extreme, reflect that in the 1680s, the Thames was frozen solid for two months.

The fact is that exteme weather has never been all that unusual. It's just that today, every episode is used to justify the existence of climate change and its allegedly human cause. Melting ice? We're burning too much carbon fuel. Floods? Our warmer atmosphere carries more moisture. Hurricanes? They're created by warmer seas. Droughts? That's warming too. Snow? The Gulf Stream is shifting. Heatwaves? Do you need to ask?

Of course, much of this is based on questionable evidence: global temperature rises have stalled in the last decade; Pacific hurricane intensity has been low since the mid-1980s; Antarctic ice is increasing; atmospheric moisture levels  are no higher. But the real problem is that a theory that supposedly predicts anything in fact tells us absolutely nothing. As the Scientific Alliance puts it:

Overall, the impression is that some people are taking whatever opportunities they see to find examples of what global warming may be doing, which by inference is then due to our carbon dioxide emissions. The purpose is presumably to stiffen political backbones and keep policies aimed at radical decarbonisation on track.

But there is a deeper agenda among some campaigners. The first element of it is to suggest that industrialisation and economic growth are our problem. In fact, they are the solution. The economist Andrew Lilico points out that, even if we assume that global warming is a reality, it is far cheaper and more practical to adapt to it than to try to reverse it. And economic growth makes us rich enough to make those adaptations. For future generations, it will be even easier.

The second element is that, when any sort of problem occurs – and not just some weather event –  people are inclined to say 'the government should do something about it'. So the more problems that campaigners can create, the more pressure there is for government expansion. And, indeed, for political intervention into markets. One can already see the insurance companies being lined up for a beating. Can it be long before they are told they have to provide cheap flood cover to everyone, no matter how often their riverside homes have been inundated before? The result, of course, will be that more people are encouraged to build and live in flood-prone areas – or that insurers simply leave the market and nobody can get bad-weather coverage at all. 

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On why the Club of Rome was wrong

Written by Tim Worstall | Monday 17 February 2014

I think we all recall the Club of Rome report that came out in the early 1970s? That all minerals were going to run out imminently and that therefore by today we'd all be dead?

I've recently found out that it all depended upon an assumption which was questionable to be polite about it. That assumption being that mineral resources were around ten times mineral reserves. Thus we can look at the official numbers for reserves, work out how much is used each year and thus work out when the resources will run out. Add in a bit of growth in consumption and we get to scarily close, in historical terms, numbers for when we are all savages plundering the decayed remnants of our civilisation.

The problem is that this assumption is untrue. Not just a bit off, wildly inaccurate even, but just plain flat out wrong. For there is aboslutely no relationship at all between mineral reserves (the working stock of current mines, largely speaking) and mineral resources (again largely speaking, where we know we could go and open new mines). Simply nothing at all: for metals like germanium, gallium, tellurium, there are no reserves at all, certainly no resources and yet there's vast amounts of these metals lying around all over the place. For the first two we throw away many hundreds of times current snnual usage in minerals that we already process, we just don't bother to extract them. For others like, say, potassium for fertilizers reserves are some 50 odd years while resources are 13,000. To claim a 10:1 ratio is just nonsense.

But it is nonsense that leads to the desired conclusion. For financial reasons reserves are rarely more than 30-50 years' worth of production. So claim that resources are ten times this, add in some growth in consumption and you will always come to the conclusion that there's not that long before we all die AIEEEEE! Thus the conclusion reached by the Club of Rome is something that is baked into their assumptions, not a reflection of anything about the real world that the rest of us inhabit.

There's more though! While reading through these reports to work out what they were really saying I came across this paper, A Comparison of the Limits To Growth With Thirty Years of Reality. Essentially it's a defence of the fact that nothing the Club of Rome predicted actually happened but just you wait, it's about to. And in this paper I came across this delightful point:

First, it is assumed here that metals and minerals will not substitute for bulk energy sources such as fossil fuels.

What? But, but, that's what renewables are! We substitute silicon, gallium, a bit of germanium (other designs use cadmium and tellurium etc) for the fossil fuels we would use to generate electricty by making those metals into solar cells. Wind turbines are using aluminium and rare earth metals to do much the same thing. The entire point of this Great Green Gambit is that we're using metals to substitute for fossil fuels.

The first report got the availability of minerals and metals wrong, howlingly wrong, and that is what would lead to disaster. This second report agrees that metals are easier to find than that but then goes onto state that we won't actually use them and therefore diaster will follow.

Both reports are, therefore, wrong. Unfortunately, the people who rule our world tend to believe the reports.

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And here's another problem with the climate change debate

Written by Tim Worstall | Sunday 02 February 2014

This article by Michael Mann is an interesting example of something that has gone wrong with the climate change debate. For what we're getting is people who claim expertise in one part of the problem insisting that said expertise gives them power to determine what should be the answers to other parts of said problem.

As ever, let's not get into the shouting match about the science being all wrong. Let us just, for the moment, accept what the IPCC tells us. Yes, even including Mann's hockey stick:

I have made my position on the Keystone XL pipeline quite clear. Approving this hotly debated pipeline would send America down the wrong path. The science tells us now is the time that we should be throwing everything we have into creating a clean 21st century energy economy, not doubling down on the dirty energy that is imperiling our planet. Now that the State Department has just released a final environmental impact report on Keystone XL, which appears to downplay the threat, and greatly increases the odds that the Obama administration will approve the project, I feel I must weigh in once again.

Erm, why must you weigh in again? You're a climate scientist. You work on temperature reconstructions. What on earth do you know about the economics of the oil industry?

And that's what our problem is here. Again, leave aside whether you believe Mann's science or not. Let us just, for the sake of argument, accept it for the moment. Excellent: so he's identified a problem, one that we should think carefully about. The same could be true of all sorts of people who have contributed to the IPCC reports. But the climate scientists are not the people we should be listening to on what we do next. For they've no expertise, not even any knowledge, of the subject that is crucial to what we do actually do next.

Economists know a great deal about what we should do next: Stern, Nordhaus, Greg Mankiw, in fact a goodly portion of the entire profession, would say that you whack on a carbon tax and you're done. Things like pipelines will then be controlled by whether they can carry the cost of that tax or not. As it should be: we've stuck our oar into the price system over an externality and can leave the market to sort out the impications. Even James Hansen has got this message.

OK, you might not like that answer either: but it is at least coming from people with qualifications in the relevant field. Asking Mann what we should do about climate change is as odd as asking an economist to do paleobiology: not just a waste of time but something highly likely to come up with the wrong answer.

And I do insist that this is a particular example of a larger problem. Being able to decipher what cloud cover does to temperature does not make one an expert in how to change the behaviour of human beings. That how cloud cover changes temperature is a building block of our knowledge of whether climate change is a serious problem or not is entirely true. But that simply doesn't mean that being able to pronounce with confidence on the one subject offers any insight at all into the second.

As you all know I'm perfectly happy to leave science to the scientists (and yes, I know many of you disagree). But I do insist that whether there is a problem is a different question than what we do about it if it is. And it requires entirely different skill sets to answer that second.

The people we ought to be listening to about what we do are the economists: assuming we believe what the climate scientists are telling us in the first place.

By the way, the economists and the engineers have spoken on Keystone XL now. It's not going to make any noticeable difference to emissions because those Canadian sands are going to be developed anyway.

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It could be that climate change just isn't worth worrying about

Written by Tim Worstall | Saturday 18 January 2014

As you all know I'm perfectly willing to go along with the idea that climate change is indeed a problem that we are doing something about and that that something should be a carbon tax. All of this being based on the dual points that I know nothing about the science of all of this but a great deal about the economics. So, if the scientists tell me that it's happening then OK, here's what we should do about it.

And it's worth noting that this makes me entirely mainstream: think of that, a subject where Worstall is in fact entirely mainstream. It's what the Stern Review says for example.

However, the next IPCC report may well end up with my changing my views on this. Here's a taster from a recently leaked version:

Containing the concentration to 480 ppm “would entail global consumption losses” of 1 percent to 4 percent in 2030. That range would rise to 2 percent to 6 percent in 2050 and then to as much as 12 percent in 2100 when compared with scenarios that don’t involve fighting climate change, according to the document.

The only argument in favour of doing something about climate change is that not doing something will be even more expensive than doing something. And the calculation was, from the Stern Review, that we should be willing to spend 1-2% of global GDP each year in order to avoid a near catastrophic 20% decline in it when the changes occur. But it's important to note that that 20% decline is only a possibility, even Stern didn't say it was a certainty.

But now we've got the IPCC apparently saying that we're going to be losing 12% of GDP globally in order to avert the possibility of a 20% decline. That's not a cost benefit analysis that makes sense.

Which leads us to a quite delightful possibility. That the next IPCC report on hte dangers of climate change is actually going to end up proving that we shouldn't do anything about climate change. For the doing things will be more expensive than the damages we suffer from not doing anything.

Probably, given that that 20% decline in GDP is indeed only a possible event, not a certain one.

And yes, I am aware that that picture of the polar bear is not one drowning because of the melting ice.

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People just aren't as stupid as the bureaucrats think

Written by Tim Worstall | Friday 17 January 2014

It's claimed as one of the great victories for enlightened (sorry) regulation, the way that the EU and US have both banned the incandescent light bulb through bureaucratic action. The ban came about by raising the efficiency standards required: this meant that the traditional bulb could no longer be sold.

The argument in favour of doing things this way was, in public at least, that everyone's too stupid (or, in a more polite manner, subject to hyperbolic discounting) to realise that the new bulbs will actually save them money in the long term by consuming less electricity. There are also the more cynical in the industry who insist that it's actually a case of regulatory capture. The light bulb manufacturing companies managing to get us all away from using cheap as spit bulbs and onto something with a decent margin on it.

But there's an interesting new paper that puts that first explanation to rest:

It is often suggested that consumers are imperfectly informed about or inattentive to energy costs of durable goods such as cars, air conditioners, and lightbulbs. We study two randomized control experiments that provide information on energy costs and product lifetimes for energy efficient compact fluorescent lightbulbs (CFLs) vs. traditional incandescent bulbs. We then propose a general model of consumer bias in choices between energy-using durables, derive sufficient statistics for quantifying the welfare implications of such bias, and evaluate energy efficiency subsidies and standards as second best corrective policies if powerful information disclosure is infeasible. In the context of our theoretical model, the empirical results suggest that moderate CFL subsidies may be optimal, but imperfect information and inattention do not appear to justify a ban on traditional incandescent lightbulbs in the absence of other inefficiencies.

To translate that for you: people aren't as dumb as the bureaucrats think. We're all perfectly capable of working out whether the energy savings will make up for the higher initial cost.

This has a number of implications in hte larger world as well: for example, it means that bureaucratic regulation on car mileages (like CAFE in hte US) is contra-indicated. A simple tax on petrol will drive up average mpg because we're not all as thick as bricks. Assuming that climate change really is a problem that must be dealt with then a carbon tax is going to do the job. For we're not all so dim that we cannot work out the utility of using fossil fuels or not given the change in prices.

That is, we don't need to be regulated into behaviour, we can be influenced into it through hte price system. Something that really shouldn't be all that much of a surprise to us market liberals: for we're the people who already insist that people do indeed respond to price incentives in markets.

Now all we've got to do is convince our rulers of the righteousness of this point: so they can stop writing those darn regulations.

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