Wednesday, November 26, 2014

The Climate-Policy Trap

ROME – Today’s policies to combat climate change cost much more than the benefits they produce. Unfortunately, bad political choices often make these policies even less cost-effective.

Consider the European Union’s 20-20 policy, which targets a 20% reduction in CO2 emissions below 1990 levels by 2020. It is important to examine this approach, not only because the EU is pursuing the world’s largest and most ambitious climate policy, but also because other climate policies suffer from similar shortcomings.

The most cost-efficient way to achieve the 20% target would be to operate a single, EU-wide carbon-market, which would cost the EU about $96 billion annually by 2020. But the benefits to the entire world would be much lower. Indeed, the only peer-reviewed overview of EU climate policy estimates that it can avoid climate-related damage of about $10 billion per year. So, for every dollar spent, the EU stands to avoid about ten cents of damage.

This does not mean that climate change is not important; it means only that the EU’s climate policy is not smart. Over the course of this century, the ideal EU policy would cost more than $7 trillion, yet it would reduce the temperature rise by just 0.05oC and lower sea levels by a trivial nine millimeters. After spending all that money, we would not even be able to tell the difference.

Advocates of the EU’s policy often argue that we should pursue such policies nonetheless, because there is a risk that global warming will be much more severe than currently expected. But, though this argument is valid in principle, economic models show that this risk has only a moderate effect on the best policy. Moreover, the absence of any temperature rise over the past 10-17 years has made such worse-than-expected outcomes extremely unlikely.

The real risk concerns the potential for bad political choices to make climate policies worse than necessary. The EU did not just implement a single carbon market in order to meet its target for CO2 emissions. Instead, the EU made a bad deal a lot costlier through a host of partly contradictory policies.

For example, the EU demanded that renewables like wind and solar account for 20% of energy supplies by 2020, though this is by no means the cheapest way to cut emissions. In fact, putting up a wind turbine cuts no extra CO2, because total emissions are already capped under the EU-wide carbon-trading scheme. It simply means that when Great Britain installs a wind turbine, it becomes cheaper to burn coal in Portugal or Poland.

Taking into account such poor policies and averaging all macroeconomic models, the EU is more likely to pay around $280 billion per year to avert $10 billion in damage. In other words, the poor design of EU climate policies triples the cost and prevents only three cents of climate damage per dollar spent.

But it gets worse, because these models still assume that the EU picks the cheapest renewables to fulfill its requirements. Instead, most EU countries give higher subsidies to the most costly renewables.

For example, cutting a ton of CO2 with on-shore wind turbines in Germany probably costs about $35, avoiding about 14 cents of climate damage per dollar. But offshore wind turbines cost about $150 per ton of CO2, avoiding just three cents of climate damage per dollar.

Biofuels are even less efficient, costing more than $300 per ton of CO2 avoided, while doing just over one cent of good per dollar. And solar takes the absolute prize, costing more than $800 per ton of CO2 to do less than a cent of good per dollar spent.

These prices are not unique to Europe. China pays $38 per ton of CO2 avoided with wind power, for example, while the US pays around $600 for cutting a ton of CO2 with biofuels.

Moreover, when the EU decides to cut its domestic emissions, part of the reduction simply migrates elsewhere. If making a product in the EU costs more because of higher energy costs, the product will likely be made somewhere else, where energy is cheaper, and then imported into the EU.

In fact, new studies show that 38% of the EU carbon cuts leak elsewhere, meaning that European climate policy avoids not three cents of climate damage per dollar spent, but less than two. From 1990 to 2008, the EU cut its emissions by about 270 million metric tons of CO2. But it turns out that the increase in imports from China alone implied an almost equal volume of extra emissions outside the EU. Essentially, the EU had simply shipped part of its emissions offshore.

Finally, the negative effects of poor climate policies are not just financial. Biofuels, for which the EU alone is now paying more than $10 billion annually to do less than one cent of good for every dollar spent, also take up fields that otherwise would have produced food.

That means that food production moves elsewhere, often to farmland created by cutting down forests, which releases more CO2 and damages biodiversity. It also drives up food prices, which so far has pushed at least 30 million poor people into starvation, with another 40-130 million expected to be starving by 2020.

We need a smarter approach to tackling climate change. Rather than relying on cutting a few tons of incredibly overpriced CO2 now, we need to invest in research and development aimed at innovating down the cost of green energy in the long run, so that everyone will switch.

For now, our current climate policies are poor – and our politicians consistently find ways to make them even poorer. They may please farmers and other interest groups, but overall they simply drive up costs and reduce already-minimal benefits.

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    1. CommentedJohn Champagne

      I take it that the costs of climate change are reckoned in crop losses due to more extreme weather, damage to infrastructure due to more intense storms, the need for additional electricity generation capacity (to supply additional air conditioners during more frequent heat waves) and other new infrastructure (to shield against rising sea level), loss of coastal mangrove swamps and other wetlands (to rising sea levels) where commercially valuable fish spawn, and perhaps other costs that I can't think of now. Correct me if I have mentioned some costs that were left out of the calculation.

      How is the cost of lost polar bear habitat calculated? Or is it? How is the cost of lost species calculated? Some species can migrate northward as temperatures rise. But we have largely foreclosed that possibility with our paved and fenced world now. Mountain-dwelling plants can migrate up-slope to some degree as temperatures increase, but this possibility exists only so long as there is an up-slope to go toward. Those plants already adapted to living near the tops of mountains may have nowhere to go to. And this is a slow process. Plants already at risk due to loss of pollinating insects may not be able to withstand this additional challenge to their survival. How is the loss of biodiversity calculated as a cost of climate change? Or is it?

      If biodiversity is not a value that is reflected in the calculations, then the numbers presented are at best misleading. If diversity of life is reflected as a value in the calculus, then it is certainly a factor that it would seem to be hard to fix with precision. Those who say that we should not base our policy on economists' bean counting have a point. We cannot put a price on the value of a diverse and resilient ecosystem any more than we can easily put a monetary measure on the value of a breath of fresh air or a beautiful sunset.

      The question for a democratic society is, "What amount of carbon dioxide should we allow to be released into the air each year (and what amount of methane, and what amount of various other materials)?" If we notice that most people want significant reductions in carbon emissions (because we decide to take a random survey and ask the question), and if we know that actual emissions are far in excess of what most people feel is acceptable, then we can ask, what is the cost of sacrificing our democratic principles on the altar of economic growth?

      The truth is that a path forward that assumes perpetual economic growth is a road to oblivion. The cosmos cannot support the growth projections that are offered as the basis for comparison in this analysis. We *can* create a society that grows in productive capacity when people learn new ways of making wealth *without* growing in its tendency to squander natural wealth and foreclose future opportunities for those not yet born. I believe that to do so, we will need to recognize a shared ownership in the natural wealth of the planet. We will need to impose the fee or tax (or adopt a system that provides for sale of a limited number of permits at auction) and make the price of various kinds of environmental impacts (emissions and extractions) high enough so that the overall impacts of the various kinds do not exceed what most people feel is acceptable. The fee proceeds should go to all the people, to each an equal amount (or according to a sliding scale, based on income and endorsed by the people at large, to be determined by random survey).

      I agree with Dr. Lomborg that we should end policies that subsidize inefficient industries. The market can work out the best path forward *when all costs are properly accounted for*. (This article unfortunately omits any direct discussion of external costs.) As fossil fuel (and manufacturing based on extraction of virgin raw materials) becomes more expensive, market forces will favor investment in alternative forms of energy (and manufacturing based on recycled materials) AND they will favor increased efficiency AND changes in lifestyle choices, all of which would contribute to the stability and sustainability of civilization. Appropriate fees, with sharing of fee proceeds, would mean a sustainable and more just society. Political pressure to promote economic growth would abate, since downturns in economic activity would not bring with them extreme economic hardship and strong perceptions of economic injustice, because every person would retain their share of natural wealth as a cushion against any hard bumps in their road.

      Equal sharing of Natural Resources promotes Justice and Sustainability:

    2. CommentedDonald Hanson

      The striking thing that I see is where we spend the money. I was a nuclear operator and fixing a problem by politics is not fixing the problem at all. The question should be how many scientists can we invest in? We don't invest in science. Windmills aren't science. They are engineering problems at best. We can calculate the exact energy that passes by one, wind speed, air density and bam that is the limit. Why not spend money on nuclear fusion research and nuclear power research? I haven't got the numbers but I think we have paid more in the past ten years for windmills than all the money we ever spent on nuclear research starting in the 40's. How does that make sense?

    3. CommentedJohn Smith

      One problem with investing in R&D: such investments never work. Indeed, I can think of no example where targeted R&D investments--such as those proposed here for innovations in green energy--have worked to hit the target.

      I hate to say it, but I think the market will provide the best incentive here. Companies are already scrambling to produce better (in other words, more green) energy at cheaper prices. Better to let the market work than to distort it and waste precious tax money on enriching rent seekers and doing little or nothing for the public good.

    4. CommentedMatt Stillerman

      Dear Mr. Lomborg,
      There are so many mistakes in this article, it is difficult to know where to begin!
      As usual you make the mistake of assuming that bean counting (a cost-benefit analysis) is a good way to arrive at public policy. This was thoroughly debunked in the 1970s (c.f. E.F.Shumacher, "Small is Beautiful"). Economics gives the wrong answer, manifestly, time after time.
      What about this specific point? Here, you are ignoring the fact that the targeted reduction in E.U. emissions will establish a baseline for future reductions, both within the E.U. and elsewhere. Indeed, the E.U.'s relations with nations that are receiving the brunt of initial global warming effects could be severely, negatively impacted if they are not seen as "doing their part".
      To make this point clearer, consider my own personal contribution to atmospheric carbon. If I were to reduce this to zero, the net effect on climate would be minute, but the cost to me would be immense. And, most of the benefits of that increment would accrue to others. From an economic standpoint, this is a strong argument for me to do nothing to reduce my carbon emissions -- manifestly the wrong decision. Why is this the wrong decision? Because, if everyone follows this same logic, then there will be no reduction at all, and climate change will continue unabated. Instead, we MUST abandon this destructive focus on economic arguments, and realize that we are in a life-boat together, and that our survival depends on everyone doing what they can, however small.
      If you insist on taking an economic approach to this problem and similar problems, then I recommend looking at the work of Elinor Ostrom, the Nobel laureate in Economics for 2009. She received the prize for her work on governance, particularly of the commons. The commons at issue here is this climate-lifeboat-planet that we all inhabit.

        Portrait of Bjørn Lomborg

        CommentedBjørn Lomborg

        Dear Matt. Thanks for your comments. You are right, we should not make the decision on *private* costs vs *private* benefits (since cutting CO2 cost would be significant, and the benefits trivial.
        But this is not the argument I'm making. I compare the *private* cost for the EU with the benefit for the *entire* world. So I am making the best-case comparison for climate action.