Climate Change Workshop
Presentation
Rod Duncan
Charles Sturt University
Institute for Land, Water and Society
What is an economist not going to talk
about?
• The science of climate change
What can an economist add to this
debate?
• Developing institutions to deliver a solution to a
social problem is one of the core uses of
economics- “What do economists do?”
– Changing laws about flood insurance can encourage
developers to put fewer homes in flood plains.
– Fixing Federal and State regulations governing
hospitals can lead to lower costs for delivering
medical services.
– Implementing an emissions trading scheme can
change behaviour and lead to lower levels of carbon
emissions.
What can an economist add to this
debate?
• Economists use complex models predicting human
behaviour to develop institutions to achieve a social
goal. Our climate change policies fall squarely in this
realm.
• Economics can not inform your decision about whether
climate change is happening, but economics can
inform you about whether proposed policies might
slow down or speed up climate change.
• Given a long history of policy analysis in economics,
what do economists know? What tends to happen?
The good and the bad.
What our models say? IPCC AR4
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
Oct-06
Aug-06
Jun-06
Apr-06
Feb-06
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
Dec-04
Oct-04
Aug-04
Jun-04
Apr-04
Feb-04
Dec-03
Oct-03
Aug-03
Jun-03
Apr-03
Feb-03
The bad: Humans are crap at
prediction!
All Ords Price Index
8000.00
7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
Nov-08
Aug-08
May-08
Feb-08
Nov-07
Aug-07
May-07
Feb-07
Nov-06
Aug-06
May-06
Feb-06
Nov-05
Aug-05
May-05
Feb-05
Nov-04
Aug-04
May-04
Feb-04
Nov-03
Aug-03
May-03
Feb-03
What happened next? Picking on
economists
All Ords Price Index
8000.00
7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
Predictions
• Moral: Humans are terrible at predicting the future.
Economists- who predict for a living- are also terrible!
• My concern is that our love of prediction and our
possession of models gives us a false sense of security.
There is an illusion of control that comes with
prediction. The future may be far better or far worse.
• Prediction of climate change impacts relies on our
prediction of:
– Events 100 years in the future
– Human behaviour
– Advances in technology
Terrible predictions 1
• Anyone who was around in the
1980s remembers the “Japan is
taking over the world” panic.
• What is your bet about the
current “China is taking over
the world” panic?
Terrible predictions 2
(From the 1972 version of
Ehrlich’s book)
“… a minimum of ten million
people, most of them
children, will starve to
death during each year of
the 1970s. But this is a
mere handful compared to
the numbers that will be
starving before the end of
the century.” (p. 3)
Terrible predictions 3
• An informal group calling
itself the “Club of Rome”
and academics at MIT
predicted a future of
resource shortages and
rapidly-rising populations
leading to an
environmental collapse by
early 21st century.
Limits to growth?
• Turner (2008) re-ran the
Club of Rome simulations
and plotted in observed
reality (the purple dots).
• In Figure 7, the “standard
run” for LtG had
production of food per
capita collapsing around
2020.
• Time to buy grains
futures?
Why are we so bad at prediction? Long
stretches of time
This image is from the City of Sydney's Sydney Streets exhibition :
http://www.cityofsydney.nsw.gov.au/history/SydneyStreets
• This is a view of Oxford
Street, Sydney, in 1910.
• About a great a stretch
of time separates us
from 1910 as separates
us from 2100.
• Would we in 1910 have
been successful at
predicting the world in
2010?
Human behaviour is hard to
predict (see GFC)
• It’s much easier if our models do not include
humans (or at least human choices) at all.
• Ehrlich and the Club of Rome failed to include
human choices and behaviour in their models.
• Our global climate models (general circulation
model or GCM) painstakingly model the physics
and chemistry of climate change but have no
humans in them. Carbon emissions grow at 6%
per annum or some other assumption.
Predicting future technology
• Humans are truly awful at
predicting what paths
technological progress
will follow. According to
this TV show, in the 23rd
century we have:
–
–
–
–
–
Faster than light travel
Phaser weapons
Ugly polyester uniforms?
No cellphones or iPads?
No huge flatscreen
displays?
– Webcams? Facebook?
The good news: Costs of change
• We also know that costs of change are often far
lower than estimates made before the change
happens.
• Humans believe that a change will be more difficult
than the change usually turns out to be.
• Humans under-estimate human ingenuity: our
capacity to learn and change and our capacity to
solve problems.
What is likely to be the cost of the
Murray-Darling Basin Plan?
• The MDBA is planning to acquire 3,000-4,000 GL of
irrigated farm water through purchases and
efficiency measures (30-40% of current total used).
• The debate has focussed on the loss in agricultural
output. (Ignoring the benefits from a healthier
MDBP, the costs of poorly misspent taxes for farm
irrigation efficiency and many other factors.)
• The MDBA estimates that with a reduction of 30-40%
in water allocations, the gross value of irrigated
output will drop 13-17% or $0.8-$1.1 billion per year.
But is this likely to be true? How
costly is a 30-40% reduction?
• We’ve already had a natural experiment in reduction
of water use in the MDB. The recent drought in the
MDB reduced irrigator water allocations. From a
Wentworth Group press release:
2000-01
Irrigation water 10,500 GL
used in MDB
Gross value of $5.09 bn
irrigation in
MDB
2007-08
Reduction
3,000 GL
-70%
$5.08 bn
-20% in real
terms
A drop of 13-17% in farm incomes
is likely an over-estimate
• If gross farm income falls by 20% due to a 70% reduction in
water allocation, how much of a drop in income will a 30-40%
drop in water allocation in the MDB cause?
• Remember also this is gross, not net, farm income. The
impact on net farm incomes will be less.
• The water rights will be purchased from the farmers. Farm
incomes (including water sales) will be higher than without
the Plan.
• Over longer time periods, and without the uncertainty of a
drought, farmers will change the way they farm, introduce
new technologies and new crops and adjust to the lower
water allocations.
But the over-estimation of costs of
change is a persistent pattern
• The US Office of Technology Assessment (1995) review of
OSHA found a pattern of over-estimation of costs of adoption
for workplace safety rules.
• Harrington, Morgenstern and Nelson (1995) reviewed EPA and
OSHA rules and found that, where economic incentives were
used, costs of compliance were uniformly over-estimated.
• Chestnut and Mills (2005) found that the estimated costs for
SO2 and NOx reductions in the US in 2010 were half the level
predicted in 1991. They cited flexibility and new technology
as key.
Supply versus demand of new
technologies (some economics)
• My bet: We will not solve climate change by uninventing technologies. Humans are far too attached
to the benefits of technology. We need a
technological solution. What it is, we don’t know.
[See “prediction of new technology”.]
• But we can increase the supply and demand for
technological solutions. Government subsidy of
research increases the supply of new technological
solutions.
• But we should also be thinking about increasing the
demand for solutions.
Benefits of a low carbon tax
• A carbon tax would prompt the private sector
into thinking about solutions- increasing the
demand for solutions.
• Even a low carbon tax is an improvement over
a free price for carbon emissions.
Addendum
What is the biggest (short-term)
risk to an ETS?
• Any climate change policy faces a large political risk
in an environment where the political parties are so
divided on the issue.
• When the opposition gets into power, what will
happen to a carbon tax or ETS?
• If you were a power generator, one of your assets
may be the emissions permits you have purchased.
What happens to the value of those assets when
government policy changes?
• From WSJ July 12, 2010
• This is the market price for SO2
emissions allowances.
• A court decision in 2008
altered the way the Federal
EPA could regulate SO2
emissions- requiring less
market-based solutions and
more direct regulation.
• The market for emissions
allowances collapsed. What
had been a success story for
market-based programs was
ended by a court decision.
Peeing in the public pool
• Argument: Australia is a small emitter of carbon on
a world-wide scale. What is the value of Australia
acting unilaterally?
• Argument: If I pee in a public pool, it’s just a small
release of urine in a large pool. What difference
does it make to people also swimming in the pool?
• It’s the same argument.