Tuesday, 24 March 2015

Climate Change Debate Part IV: The Final Cost-Benefit Analysis

Here we are with the final part in the Climate Change Debate series. We've seen in parts one and two how our foresights into the future are mostly beset by uncertainty, and how the present (not the future) should be the primary consideration for the debate. We saw in part three how the science is right about many of its claims, but that caution is of paramount importance. Now to conclude we'll undertake a cost benefit analysis about whether green policies in the here and now are good or bad in net terms. I will look to show, in the arms race between green polices and scientific augmentation, that science is a heavy odds-on favourite when playing the long game.

When debating climate change a lot of people just don't get this one key point they really need to get - that it's all about the net result, not just whether we are causing harm.

This Greenpeace page is a typical example of an article that conveys the basics of the dangers of climate change. Here's the main crux of what we are told:

"Climate change is caused by the build up of greenhouse gases - from burning fossil fuels and the destruction of areas that store massive amounts of carbon like the world's rainforests. No one knows how much warming is “safe” but we know that climate change is already harming people and ecosystems around the globe".

Do we know this in 'net' terms though? We know that climate change is occurring; we also know, or are willing to consider, that humans are contributing to a vast proportion of it. But as far as I know we don't know what proportion of climate change is down to humans - and if we don't know that, we certainly do not have any justifiable substantiation that our contributions are harming the planet in terms of net harm. I've no doubt many people could send links to papers in which people have alluded to plenty of correlations - but I'll wager that those papers do not contain any evidence for causal links that demonstrate beyond reasonable doubt that the human contribution is the thing that's causing harm. Remember that key difference: there's a difference between causing climate change (which all of us should be ready to accept) and causing aggregate harm (which all of us should not be ready to accept). If our activities are not causing net harm, then many if not all the current environmental policies enforced on us may be misjudged.

The green position seems to be: assume we have justifiable substantiation that our contributions are harming people, and in response take mitigating action. This is not a very sensible thing to do. The method should be, first obtain confirmed evidence (remember, evidence of net harm, not evidence of humans causing climate change), and then act on it.

A friend of mine once objected to this as he used the following analogy to try to justify the notion that preventative action is a way of minimising the harm: "You don't wait for a probable whooping cough outbreak before vaccinating children against it”. In some cases preventive action is good. But his is a bad choice of analogy - it is easy to assess the net harm that whooping cough does to people's health, and there are very few offsetting benefits to whooping cough either. Neither can be said of green measures. Plus vaccination against whooping cough has few detrimental effects on the economy and on our liberties and freedom - whereas green measures have plenty.

What greens have to demonstrate is evidence that the human effect brings about net costs, and that green acts of mitigation bring about a net gain. I have seen evidence for neither. To put it another way, even by asking whether there is justifiable substantiation that our contributions are harming people, they are asking the wrong question. There's no doubt our activities cause some harm (even taking a flight to Canada or a taxi to the train station causes some harm) - the vital question is, does the net harm outweigh the net benefits, and do the mitigating activities confer more benefits than costs? If the answer to both is no - and I'm pretty certain it is - then mitigating action should be diminished - not wholly discontinued, perhaps, but diminished.

The greens tell us that 'catastrophic changes' are occurring, and that we are precariously getting swept up in a vortex of climate change. My main reason for being at odds with green-centred politics is that the fundamentals behind their ethos - "The climate is being negatively affected; humans are negatively affecting it, therefore the continuing trend is bad and needs drastically addressing", is in my view the ethos that’s presumptuous, unsubstantiated and spurious.

The problem with the above claim is that it is an assumption made without qualification. Whenever you have a situation in which X is happening (where X is negative), and Y is causing X, one can't just proclaim that the continuing trend is bad and needs drastically addressing, because there may well be other ways in which X's negativity is being offset by other factors not in the equation. 

I have only ever seen greens talk about the harms caused, they have never once compared those harms to the benefits and shown a net cost, which means they still have all their work ahead of them. Their fault is on focusing on a few global bullet points (sea levels rising, overall temperature increase, deforestation) and treating them only as bad, or as bad but understating the good outcomes. Yes, overall temperature increase contains bad effects (although one can't be certain that temperature increases are going to continue on this trend), but it also contains good effects too, as I'm sure the people of Greenland, Siberia or Alaska would testify.

As is usually the case, an economic way of thinking would guard against falling for the kind of errors the green-keens are making - because economic thinking wouldn't just involve asking whether there are good and bad effects - it entails wanting to know if there are net costs sufficient that the bad effects outweigh the good effects. How are we to tell, say, if rising sea levels in the Indian Ocean balances out with the emergence of more habitable areas of Siberia or Alaska? Don't forget this won't happen overnight - it happens over decades and centuries, so any considerations that factor in sudden and unexpected inconveniences are a solecism against good enquiry.

Don't forget also that if you asked a man in 1913 about how the world would look on a global level in 2013, he'd have no way of foreseeing it in its current set-up. If environmental changes occur over such slow passages of time, then in a few decades countries surrounding the Indian Ocean may well be well prepared for rising sea level, and Siberia or Alaska probably will hugely benefit from increased global temperature. From what I can see from looking at their literature, the greens haven't offered any proper cost benefit analysis on the dynamical change of global states - they've merely prodigiously estimated the costs and exiguously estimated the benefits. Of course, that doesn't mean the greens are wrong - it only means the methods by which they think they are right are faulty.

In offering an economic view of the situation - one that has no ideological biases - I'll tell you how I think it really is. Climate change is presumptively unwelcome, whether it is hotter or cooler, because present human endeavours are optimised specifically for present day conditions. Whether you're farming, building factories or houses, or designing railways or cars, you are optimising the production for modern day use consistent with modern day conditions. But environmental changes are gentle century-long slopes not steep month-long drops - so once you consider the extent to which activities associated with farming, factories, house, railways and cars will have changed in a century to be coterminous with the gradual changes in the environment, you see there are probably no crises at all. Given that the earth's climate and environment has been changing for millions of years, it is obvious that no climate of any time is the optimal one in absolute terms.  If there is no reason to believe that the present climate is the optimal one, then assertions that we need to be preoccupied with green issues are hard to justify, as adapting to the gentle century-long slopes of change is not only something we have to do, it's something we've been doing since mankind began.  Economic thinking enables us to not fall for these extreme knee-jerk reactions - as the climate throughout our human evolution has varied by considerably more than the comparably meagre changes being predicted for global warming in the next few hundred years.

It's because humans have lived, survived, increased in numbers and prospered over a range of climates much greater than the predicted range by climate-obsessors that economist-type thinking must, for me, involve some raised eyebrows.  It's fairly obvious that if there's no reason to believe humans will be negatively impacted by future climate change, with every evidence that our present and future innovations will more than offset any environmental shifts, it's equally absurd to bear sizeable resources (time, energy and money) trying to prevent this change. I'm not saying we shouldn't be mindful of being more environmentally and ecologically prudent, nor that we should avoid doing what we can to diminish the extent to which environmental change occurs with rapidity, but that's a far cry from addressing the issue as being an urgent, costly and radical necessity.

You are quite welcome to hold the view that there are more negative effects to global warming than positive effects, but to make it fly you must provide reasons to justify it - you can't just exaggerate the negatives and understate the positives, and decree yourself to have taken the right stance on this. I'm interested in compelling arguments, and evidence-based conclusions - but I haven't heard any yet, so for now I remain sceptical, particularly as being green-focused seems to aid popularity amongst the electorate, which does, of course, provide political parties with the motive for propagating unbalanced green-keenness.

If you instantly transported the UK 1950s population into the present day they would be quite flustered by all the changes: not only would they find technology, protocols, laws, customs and practices that baffled them - they'd find numerous changes for which they weren't prepared. What they thought was an allotment is now a shopping mall; the old tea room is now a McDonald's; and bugger me, the farm down the road is now a motorway. Radical changes to normalcy do cause lots of problems. But we are not talking about any such thing. Just as the 1950s gradually changed into the present day by passing through the 60s, 70s, 80's, 90's and noughties, so too will changes in the climate occur alongside our ability to adapt to the changing social backdrop.

A proper cost-benefit analysis
It's all very well saying 'cut down energy use' - but first we have to determine whether that energy use is worth cutting down, or whether we will develop the augmented science to adapt. In the ways that we can reduce our energy without huge costs (perhaps even net costs) fine - but if we just go all out for reduction reduction reduction (as the greens want us to) we fail to locate the point at which too much reduction is occurring.

The situation is roughly like this. If I want to build 25 houses in a green park area, the state of affairs from both sides has to be weighed up. There are clear benefits (more people having somewhere to live) and clear costs (fewer people having somewhere to play or have picnics). Does the benefit of 25 families having a place to live outweigh the costs? That depends on who you are, and your perspective - but whichever way we cut the cloth, a cost-benefit analysis would be necessary.

Green taxes are basically equivalent to those on the economic left trying to buy a world with fewer emissions, which means a reduction in greenhouse gases and a cooler planet. Just like the park situation, a cost-benefit analysis is necessary - one which no one I know seems to offer us. To automatically assume that the price we pay for a cooler, greener planet with fewer emissions and a reduction in greenhouse gases is a price worth paying is ludicrously presumptuous.

Why carbon taxes are flawed
The problem with carbon taxes in the present day is twofold: 1) It is likely to be the case that a partial effort will not have the desired effects, and 2) An all out collective effort will probably end up being a bigger cost regarding time and money than the alternative option of more heavily investing in infrastructure to pre-empt future problems.

Number 2 is fairly obvious, as I’ve alluded to earlier - it is fairly pointless throwing billions of pounds at green policies when we can instead help the neediest people more directly with investment and aid, as well as eliminating the barriers that stop them trading. Number 1 might be less obvious at first, but it should soon be fairly obvious when elucidated. In life, partial efforts are often good, particularly if the results are not impeded by others' non-involvement. Giving to charity is a case in point - if 30% of UK folk donate to Save The Children then poor children still benefit because despite 70% not giving to that charity (some may be giving elsewhere) what they do collect still helps. Similarly if 90% of the country picks up litter then their efforts are not wasted because the other 10% did not. In the cases of charitable donations and litter picking, every little bit helps - and despite being simple on the surface, this is measured with rigorous economics (basically, if the Pareto efficiency or Kaldor-Hicks efficiencies are such that negative externalities are immeasurable or inconsequential to the positives then every little really does help).

But when it comes to reducing your own carbon footprint, things are different - because every little bit does not necessarily help - not in net terms. There are two reasons why this is the case: Firstly, reducing your own emissions is a solitary effort that will have no real impact at the global level. Even if 50% of the UK's citizens made a concerted effort to reduce their carbon footprint it would still be a drop in the ocean compared with the triune considerations of a) overall global consumption, b) the extent to which climates change outside of human involvement, and c) the comparative advancements of future generations.

And secondly, your reduced consumption will be offset by increased consumption elsewhere. As a hypothetical social experiment, suppose half the UK population were randomly drawn in a lottery and made to reduce their carbon footprint by 20%, with the other half free to carry on as normal. Here's what would happen. The reduction in consumption by half the people would reduce aggregate demand for ecologically unfriendly goods, which would see a drop in their price, which is going to increase consumption for others. What the 50% will actually be doing is helping out the other 50% in buying cheaper fossil fuels. Obviously that's too simplistic because there are global factors to consider, but they do not affect the truth of the statement that reduced consumption for some will mean increased consumption for others. 

If you can't get your head around it, imagine what would happen to the price of high heeled shoes if half the high-heeled shoe wearing women in the country stopped wearing them and reverted to flat shoes instead - the other half of the demographic would buy more pairs because they'd be getting them a lot cheaper. Moreover, because politicians can only bring about the imposition of green taxes on their own citizens, not those of other countries, the same problem will apply at a global level - reduced consumption for some countries will mean increased consumption for those other counties that will be beneficiaries of cheaper fossil fuels. The cost incurred by those carbon-reducing countries will thus have a limited payoff in terms of overall global reduction, so one can argue that they are being hit unfairly.

So it is literally the case that unless the vast majority of the world’s population are singing from the same ecological hymn sheet, environmental progress in some areas will be cancelled out by environmental regress in other areas. Given this realisation, it is even harder to justify green climate policies like carbon taxes. Politicians around the world, though, don't see things that way because they can simply impose Pigouvian taxes on the whole country, penalising everyone for consumption, emissions and pollution, in full knowledge that most of the country is either too apathetic or too daft to challenge it.

When governments can't solve a problem, you can be pretty sure that quite often the market can. The Mises Institute gives a summary here of how the market can introduce accountability to take the place of carbon taxes. But despite being a libertarian, I'm going to suggest that I don't think market forces will come in and transform this in quite the way the Mises Institute hopes; the time, money and energy expended in getting all these market forces up and running may well cost more than the benefits they engender, for reasons that will be clear shortly.

Carbon taxes: flawed but worth supporting?
Consequently, then, despite the many flaws in carbon taxes, because of the discontinuity between the status quo and the full market solutions, I'm going to tentatively argue that carbon taxes are perhaps the best option as a short term solution. I'll break this defense down into 6 key points.

1) The main defining problem of climate change is that we are all part of the problem as well as part of the solution. We all rely on vehicles that clog up the road for others, pollute the air, and put the price of fuel up. We also use our central heating, wash our clothes and buy things that came from widespread transportation. Many of us even use aircraft to fly abroad, and run businesses that emit lots of carbon. The upshot is, we all contribute to greenhouse gas emissions, so what's needed is a collective effort to change things.

2) This kind of activity has indirect consequences for people who live near rainforests, people in hot countries, and it may well even have consequences for people who haven't been born yet. Even though both the problem and the solution is a shared one, it is difficult to get everyone to co-operate in shared solutions, which is where the State comes in.

3) The State imposes price increases on our transactions in the shape of carbon/pollution taxes, which incentivises us to be self-interested in being more responsible with our environmental activities. One problem I have with carbon tax is that due to lots of asymmetry of information the setting of a carbon tax rate is almost entirely arbitrary. Still, despite this, carbon tax does some good for the following reason. People change their bad consumption behaviour to accord with differing incentives like price changes. So for example, a tax on carbon dioxide emissions of £50 or £60 a tonne would affect our consumption habits in relation to products and services associated with carbon dioxide emissions, whether it be driving, flying or whatever.

4) If this tax enabled the government to reduce taxes in other areas, then the carbon tax would help us change our habits and at the same time bring about selection pressure in the market for us to be more mindful of the environment. This is part of a general law of economics – when prices go up or down, people change their buying habits. If the price of red grapes goes up by 40% and green grapes stay the same, people will buy more green grapes and fewer red grapes. If the price of emitting carbon goes up, people will lower their CO2 emissions, which will place selection pressure on consumers and on eco-unfriendly businesses. This means that as carbon/pollution taxes endure, people will look for more ways to be greener, making us as humans more mindful of our environment.

5) Given the foregoing, it would seem to me that we appear to be doing about as much as we can to tackle climate change. That is to say, we keep hearing about how we need to act urgently to save the planet from destruction (whatever that means), but we seem to be already doing all we can to raise awareness and change people's behaviour. Ok, so perhaps we aren't doing everything we can - there is always more that we can do, but what? We are already penalised for our emissions, and we already pay higher prices for our carbon effects, and these things give us the incentive to be greener.

6) The green taxes will almost certainly bring about a phasing out of environmentally unfriendly activities. The scientific and technological capabilities we acquired in the past few hundred years is what confirms to me that we are doing as much as we should be doing, and that on top of carbon taxes, our science, technology and market activity should do the rest.

It is this last point that makes all the difference in being able to defend the short-term solution of carbon taxes, because our science, technology and market activity is what will ultimately bring about the changes needed.

The future science saving the day
So the proper cost-benefit analysis has been this: what are the costs and benefits of intervening in global warming, and what are the costs and benefits of letting it continue and doing nothing costly to slow it down? That depends on another crucial question - will future science and technology enable us to make corrections for global warming and adapt to the changes that have been caused by the increased CO2 emissions in recent decades? If the answer is yes - and all the indicators point to it being yes, then these green-centred Pigouvian obsessions will have been merely a temporary nuisance that we lived through in the intervening years.

In other words, there is an arms race between science and green polices, which science looks sure to win. Looking at some of the breakthroughs in nanotechnology and shape-shifting, as well as virtual reality simulations, gives strong indication that science will win the arms race, which also gives strong indication that green policies are causing harm in the here and now and are not going to have any net aggregate positive effects on the well-being of future generations.

Even if future capabilities will be such that climate issues will more than likely be subjugated by newer technological advancements that wean us off natural resources and enable us to harness safer potentialities, the issue of what we should do in the here and now still looms large.

You may ask how we know we'll augment our technology, and why we can be so confident about it. The reason being, it's the same indicator that we've seen in every walk of industrial and technological life for the past two centuries. Human endeavour is about improvement, which is about innovation, problem-solving and adapting to change. Obviously there are ups and downs, but the general trend is progression. Let me give you an example of justified confidence by focusing on one thing - solar power (I've picked this because it's probably going to be the kind of energy that most transforms our scientific advancements). Using solar power technology we can convert the sun's light into energy. When I was a lad even solar powered calculators were an impressive novelty - plus we had a little knowledge of how in the 1950s scientists powered a weather space satellite using solar energy.

Nowadays, and even now still in its relative infancy, we see solar panels on many roofs reducing people's heating bills; we see solar powered electric vehicles with EV charging stations; we see super skin controlled by solar power; we see solar powered E-Reading; we see solar tracker solar panels; and solar powered computer keyboards, to name but a few. It won't be long before solar energy powers just about everything: planes, buses, spaceships, buildings - you name it. Multiply those solar examples by all the other individual and collective achievements (past and present) and you'll see there is reason to have confidence in our future advancements. For now, though, as these future innovations continue to gather momentum, and as we gradually wean ourselves off the dependency of fossil fuels, I'm willing to accept that, as the best of several imperfect alternatives, carbon taxes are perhaps the best way to see us through this. Remember too, that taxes acquired from carbon emissions are taxes that don't have to be acquired from other activities. It's a golden rule that if you tax something you get less of it - so taxes that reduce our pollution but at the same time reduce our tax paying in other areas seems like the best of a bunch of less than ideal solutions.

Hopefully after our analysis you have a clearer picture now of everything that is wrong with the climate change assessments, and how much more wisdom needs to be applied to the human reaction to climate change. The final summarising point I want to make is that in light of what we’ve concluded, a sensible policy on climate change is still needed – whether that policy is to do less, more, or something different. When the State intervenes to mitigate the extent to which humans harm the planet, they are trying to prevent future damage by minimising present benefits. If present benefits outweigh future costs we should carry on enjoying them, and taxes and regulations imposed upon them are more harmful than good. If future costs outweigh present benefits then taxes and regulations imposed upon them are more good than harmful. This is what is meant by maximising utility - net benefits outweigh net costs. Greens believe that things like carbon taxes maximise utility. Sceptics like myself believe that carbon taxes far from maximise utility (even though I support them as a least bad solution). The right amount of carbon tax is this and only this: it is a tax that imposes prohibitive costs on low-utility activities while still allowing for high-utility activities. The trouble is, due to the complexity and inability to see into the future with any degree of rigour, the level of utility is hard to distil, leaving us only with probability.

The probability estimate is roughly this; if activity A has significant emissions and few offsetting benefits to make it a low-utility activity then carbon taxes on it should be encouraged. If not, carbon taxes should be discouraged. If activity B has significant emission but enough offsetting benefits to make it a high-utility activity then carbon taxes on it should be discouraged. Where the future costs outweigh the present benefits we should make the activity price prohibitive. Where the present benefits outweigh future costs we should make the activity price conducive. If under a system of high or maximum utility we can't go on to produce an alternative to our carbon taxing system then we know we are doing the best and most practical things; if we can go on to produce a better, higher utility alternative, all the better.

Let me give you a simple illustration to show this: take cars. Either the future technology will or won't turn our car industry from a high emissions petrol/diesel generated industry to a low emissions electric/solar powered industry. All the evidence thus far suggests that it will (there are electric car prototypes in place, even as we speak). Give it a few decades and there'll probably be very few if any petrol or diesel driven cars. So, then, using our utility measurement above, the right kinds of car will be produced in the future if it's efficient to do so - and this will happen irrespective of whether the State influences the market or not. It's true that carbon taxes swing the incentive towards more environmentally friendly industries but that doesn't mean it's a good thing. Taxes on foreign charity may well swing more donations towards the British Heart Foundation, but that doesn't mean this swing is a good thing either.

Here's an example of how not to undertake this analysis. The Liberal Democrats, driven by Tim Farron, want to ban all of the standard petrol or diesel driven cars by 2040 and allow only vanishingly low emission vehicles on the roads (presumably they mean electric and solar). A simple understanding of the cost-benefit analysis above would show that such a ban is irresponsible and unnecessary. Here's why. If the present benefits of petrol or diesel driven cars outweigh future costs we should carry on supporting them, and taxes imposed upon them are more harmful than good. If on the other hand future costs of petrol or diesel driven cars outweigh present benefits then taxes imposed upon them are still more good than harmful. Translated in terms of what the future will hold, what we are saying is: if future technology brings about electric or solar vehicles with greater utility than petrol or diesel vehicles then we'll see a natural switch driven by voluntary market choices, rendering the Liberal Democrat ban entirely unnecessary. But equally, if future technology brings about electric or solar vehicles with less utility than petrol or diesel ones then we won't see a natural switch driven by voluntary market choices, which means that banning such vehicles (or even heavily taxing them) will make us all much worse off. Either way, a ban is a foolish thing to impose.

Final point
Finally, on the issue of the present vs. the future, consider this question: who would find it easier to adapt to climate change - a population living in 2014 or a population living 1814? Clearly the answer is 2014. Economic, scientific and industrial advancement make it easier to adapt to the climate. The logical corollary is that even if we admit that the human innovations of (in particular) the past two centuries have caused significant climate change, it is far more practical to facilitate the economic, scientific and industrial advancements to adapt to it than it is to discontinue it. With this truth acknowledged, coupled with the earlier analysis, it is quite obvious that future generations will adapt to climate change much more easily than we could. Moreover, whatever we conclude with regard to our responses to climate change, we will not make bad policies better. For example, even if from our analysis we had concluded that a big State-driven effort is needed to mitigate the problems of climate change, it won't alter one jot the fact that the plethora of anti-market policies will continue to make things worse not better. For example, even if we decide that plenty of action is required, that wouldn't suddenly make protectionism, government subsidies, bail outs and excessive regulation more attractive.

The other danger is that with excessive green influence in our politics, anything can too easily be ascribed to climate change. Whenever ice melts we are accused of burning too many fossil fuels; whenever there are hurricanes we are to blame for increasing ocean temperatures, whenever there is a flood, a drought, heat waves, a shift in the Gulf Stream, it's all to do with human impact. And when these things happen, the first reactionary response is to implore the government to do something about it. Do these reactionaries think that floods and hurricanes and glacier melting have only occurred since humans have been around? Surely not. Don't misunderstand, I'm all for sensible mitigating action where it can be shown to be sensible, but the danger of looking for government intervention every time a snowflake melts is something that is likely to lead us astray.

Here's another obvious cost (and danger), aside from the billions of pounds - green biases skew the market in favour of renewable resource industries. If the greens get their way, they will spend inordinate amounts of money impeding the industry of the developed world, which is going to have a hugely detrimental impact on the developing nations still trying to capitalise on the industrial market of prosperity. The predicted temperature change over the next century is going to be well within the ingenuity of modern day humans, even for countries like Ethiopia and Sudan who look most likely to suffer from increased temperatures.  Don't forget, while there are many countries that will be precariously worse off due to climate change, there are many others that will be better off.

Clearly no sane and moral human wants to argue that, for example, Siberia's gain is Kenya's loss, and that one set of benefits offsets another set of costs - but the motion clearly calls for some wisdom here. If you have a situation whereby some countries are going to be worse off due to temperature increases over the next few decades and some better off, it is both ridiculous and nonsensical (not to mention harmful) to generate huge costs on an entire market industry, instead of the much better alternative of ensuring that the success of advanced economies goes towards facilitating positive changes for the less advanced economies. It may even be the case (and sadly, seemingly is) that in some of the worst cases our potential for aid and investment through advanced economic mechanisms are disempowered by various impediments in those countries (civil conflict, social unrest, political instability) - and that is devastating, but it certainly is not a situation that can be made any better by green policies.
* Photo courtesy of CartoonRob