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Carbon Economics and the Cost of Inaction

Posted on 22 August 2013 by gpwayne

This post is a new 'basic' level rebuttal of the myth: "CO2 limits will damage economic growth."

What the science says: the costs of inaction far outweigh the costs of mitigation. 

If climate change proceeds without any efforts to reduce it, we can expect to incur serious economic costs. In fact, it's not unreasonable to expect that the effects of climate change will create greater economic instability worldwide.The solution is, of course, to reduce fossil fuel use. One way to do this is to shift away from fossil fuels towards renewable energy sources. The other way is to reduce energy demands through increased efficiency.

Both mechanisms have economic implications. In order to stimulate the private sector’s investment in renewables, governments can put a levy on fuels, which may be used to fund or subsidise new initiatives.

To reduce demand, there are a number of solutions available, but most seek to raise the cost of carbon through taxes. However, such increased costs give rise to concerns that change underwritten by taxes or levies will damage economic prospects, particularly in developing countries.

The Representative Picture

In the fifth IPCC Assessment Report (AR5), a new set of scenarios called Representative Concentration Pathways (RCP) will be used. The four RCPs replace the previous scenarios from the "Special Report on Emissions Scenarios" (SRES). Each RCP represents a set of initial conditions and projections to year 2100, based on a synthesis of the peer-reviewed literature.

The graphs below show the predicted RCP trajectories for economic performance:

             

Figure 1: GDP projections of the four scenarios underlying the RCPs (van Vuuren et.al. 2011). Grey area for income indicates the 98th and 90th percentiles (light/dark grey) of the IPCC AR4 database (Hanaoka et al. 2006). The dotted lines indicate four of the SRES marker scenarios.

The number of each RCP is the forcing (in watts per square metre) associated with a specific amount of emissions for each scenario, up to the year 2100. The graph of GDP clearly shows that the pathways that reduce emissions the most in that time frame (2.6 - green, and 4.5 - red) are those with the best long-term economic performance. In other words, the investment required to reduce emissions is repaid by increased economic performance. Business as usual strategies (high-emission scenarios RCP 6 and 8.5) are the least profitable; the money saved early on is dwarfed by the costs of damage and disruption done in the longer term.

Putting a Price on Carbon

There are a number of schemes under consideration, and a number already implemented. According to the article Pollution Economics in the New York Times, more than 20 percent of global greenhouse gas emissions are now subject to carbon pricing systems. About 60 other states, provinces or countries are considering similar approaches, according to a recent World Bank report.

It’s too early to judge long-term economic performance of the early adopters, but Canada’s province of British Columbia serves as a good example of how carbon pricing can reduce fuel use - in their case through a revenue-neutral scheme. A recent study found that since 1st July 2008, when the tax was introduced:

  • BC’s fuel consumption has fallen by 17.4% per capita (and fallen by 18.8% relative to the rest of Canada).
  • These reductions have occurred across all the fuel types covered by the tax (not just vehicle fuel)
  • BC’s GDP kept pace with the rest of Canada’s over that time
  • The tax shift has enabled BC to have Canada’s lowest income tax rates (as of 2012).
  • The tax shift has benefited taxpayers; cuts to income and other taxes have exceeded carbon tax revenues by $500 million from 2008-12.

Source: BC’s Carbon Tax Shift After Five Years: Results, Elgie & McClay 2013

In a separate report, the British Columbia Department of Finance found that in 2012, BC's taxes were among the lowest corporate tax rates in North America and the G7 nations. 

Conclusions

Since a number of economic incentives are being tried, it seems too soon to declare them failures. It is interesting to note that while governments are having difficulty negotiating agreements on the global scale, regional schemes are already proving effective, flexible and popular. An important ingredient seems to be an accompanying tax reduction that makes the carbon tax revenue-neutral.

In the long term, unless we drastically reduce the rate at which we are still emitting greenhouse gases, we are very likely to incur huge costs as a result of climate change. Part of these costs will be in adaptation, and the inevitable disruption. In part costs will escalate due to turmoil and uncertainty throughout the economic world. There will also be costs that cannot be quantified, particularly when we try to value a human life and its loss.

We have to reduce our emissions. If we are to avoid draconian government intervention, carbon pricing schemes are a viable method of encouraging us to reduce fossil fuel use. Coupled with other measures to stimulate renewable energy development, putting a price on carbon may help us make the transition away from fossil fuels. And from our experience to date, it seems likely  that carbon taxes, instead of bringing an economy to its knees, may well help transform an outdated system into one fitting for a sustainable century.

Further Reading: The Intermediate and Advanced rebuttals contain detailed information about carbon pricing and tax schemes. Skeptical Science contributor Andy Skuce has also written an article about British Columbia’s experience here, with an update here describing the findings of the Elgie & McClay paper.

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Comments

Comments 1 to 8:

  1. I suspect the graph shows GDP/capita.  If not, it is missing a quantifier on the y-axis.  

    More importantly, the GDP growth scenarios are just that, scenarios.  They are inputs into determining the forcing trajectory of the various scenarios rather than outcomes of applying those forcing scenarios to an economic model and determining the consequent rate of economic growth.  As such they are not evidence for the thesis of the OP.  I say this even though I agree with that thesis, ie, that the costs of inaction are greater than the costs of action on climate change.

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  2. Comparisons of "the cost to, or lost benefit of, a current generation" compared to the "costs created for a future generation by the actions of a current generation" are fundamentally unjustifiable. And applying a "net-present-value" discounting of future costs, which is often applied to such evaluations, is an added insult to the already unjustifiable attempt to excuse benefiting from creating a future problem.

    The future generation is not a "set of shareholders in a business operation". The future generation cannot just declare bankruptcy to minimize their costs at some time in the future and "invest in a different planet".

    So it is unjustifiable, and simply not sustainable, for actions by a current generation to create a potential consequence or problem for future generations. The development of unmanageable conditions in the future needs to be stopped. All activities of any current generation need to either be of no future consequence or preferably lead to a sustainable better future for all life on our one and only shared planet.

    The challenge for the current generation is to figure out how to undo the unacceptable industrialized mass consumptive economies that have been developed by our predecessors. These types of activity should never "be protected", and certainly should never be "balanced" with someone's or some group's evaluation of their personal benefit n their moment.

    As much as possible this change of economy and lifestyle should be accomplished by all of the most fortunate being required to develop the ways to live totally sustainable lifestyles and help the lss fortunate develop to that way of living with as little time as possible spent transitioning through industrial mass consumption activities and ways of life.

    The entire population can sustainably live on our planet, as long as those whose lifestyle and ways of benefiting have the highest impact are required to change their ways.

    So the real required action is political motivation of the most fortunate to spur the scientific development of the understanding required to lead to those best ways for humans to truly sustainably live on our one and only planet.

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  3. Re my Comment 2:

    A correction in the 4th para: "These types of activity should never "be protected", and their potential impacts certainly should never be "balanced" with someone's or some group's evaluation of their personal benefit in their moment.

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  4. One Planet Only Forever @2, one aspect of the discount rate is reasonable.  If I invest a million dollars broadly across the stock exchange, and sit and wait, the real value of my investment will increase at approximately 3% per annum (or at least, has done so historically).  Now, given a choice of investing in preventing or mitigating AGW, a question arises as to the costs and benefits.  If the benefits are less than the sum of the costs x 1.03^y, where y is the year, for all years into the future, then future generations would have a higher standard of living if I that money had been invested in the stock exchange on their behalf, rather than used to combat AGW.  This part of the discount rate represents mean growth.

    Having said that, use of a 3% mean growth discount rate is not beyond criticism.  It is not guaranteed, for example, that economic growth will be able to continue at an average of 3% per annum on into the future in the face of the impacts of AGW.  In fact, it is quite possible that it may become negative, whereupon the mean growth component of the discount rate would also become negative.  It is a major flaw, IMO, of economic models of the impact of AGW that they set as an axiom that economic growth will be positive regardless of the impacts of AGW (Stern at least lowers the mean growth rate to 1.3%).

    Further, the mean growth component of the discount rate assumes that all impacts can be given an appropriate monetary value - something that is seriously in doubt for the loss of major eco-systems such as the Great Barrier Reef.  This can be partly compensated by assigning a large nonmarket value to the loss of those systems, but such assignments are necessarilly just a guess.

    The second part of the discount rate, the "pure rate of time preference" does represent a preference for the good of current generations over that of future generations.  Including it is ethically objectionable, and your argument applies directly to it, and shows the fallacy in including it in economic models.

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  5. Tom Curtis @ 4.

    Economic growth that relies upon actions that are not sustainable is not sustainable.

    The theoretical presentation of "eternal growth at a certain percentage" misses the essential need for all the activity to be truly sustainability. Growth of any activity that is not sustainable is of no value in the future. Burning of fossil fuels for energy is not sustainable even with "actions to try to mitigate the consequences". The consumption of any non-renewable resource without full eternal recovery and recycling is also fundamentally not sustainable.

    So to get the eternal growth your theoretical presentation relies upon, activities that are not sustainable must not be part of the growth, they must be stopped. Then the truly sustainable activities can meaningfully grow indefinitely, as they would need to in order to actually eternally develop a better future for all life on our one and only planet.

    The climate change aspect is actually not really the reason to stop the current industrialized wasteful mass consumption aspects of the economy. It is an aggravating factor. Eternal economic growth will be possible when all human activity is truly sustainable, and is impossible until we develop to that way of living.

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  6. Another correction to my comment 5. (I tend to rephrase things as I go and really need to let the comment sit for a bit then review it before posting)

    The start of my para 3 should be:

    "So, as you noted, to get the eternal growth the theoretical presnetation relies upon..."

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  7. Going back to look at the sources, Figure 1 in the post plots World GDP in $ trillions at 2000 prices. 

    One of the problems I find with this economic side of AGW is that economics is a rather esoteric subject based on the wholly artificial concept of wealth. Developing any economic argument is difficult at the best of times and it appears all too easy for somebody to make a nonsense of your work if they wish. And with AGW there are plenty of wreckers who do so wish.

    For instance, Figure 1 shows a drop of 40% in world GDP for the higher emission scenarios. "Ah, but they will still be vastly more wealthy than we are today," is the sort of reply you would get from the likes of GWPF who would probably add "And don't forget there will be benefits as well as costs associated with AGW."

    The word "cost" makes everything allowable as long as you have the wealth to pay for it. Strangely, the damage wrought by our collective refusal to accept the "cost" of effective and timely AGW mitigation measures will initially impact those societies that have the least wealth and themselves wrought the least damage.

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  8. One Planet Only Forever @5 and all the others.

    I believe I've met another realist.  All arguments based on past projected scenarios are highly suspect, if not totally obsolete.

     

    We can rationalize any thing we want to do, but using "future value scenarios" predicated on the artifice of monetary gain is an exercise in ..  futility.

    What we have, here, is the "going away" of ALL value, as measured by the rate of species extinction:  which is OUR EXTINCTION...  If our ankles were rotting away, perhaps the seriousness of the scenario would be apparent.

    We'd best be about managing a radical change to a more sustainable future immediately, or society will disintegrate, social unrest will be rampant, and we will not be able to mount a response other than dying.

    One Planet Only Forever, amen.       

     

    —used to express solemn ratification  or hearty approval (as of an assertion)

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