Wednesday, 31 July 2019

A Great Example Of How Not To Reason


A reader called Cecil Hughes responded to one of my recent climate change articles, calling into question whether I'm really an earthling:

"Dear Mr. Knight, Having read your article on climate change I begin to wonder if we are living on the same planet. You may be interested in this article by Mark Lacey which I have recently discovered."

Here is my response to Mr. Hughes:

Thanks for sharing, Cecil. I’ve read it during my lunch. It’s good that you gave this article as an example of one I need to read, because it’s a perfect case that demonstrates how to get an analysis utterly wrong. Here’s why. Mark Lacey says:

“Alternative energy sources to fossil fuels have been around for many years. Wind, solar and tidal power have all been harnessed to a greater or lesser extent by numerous countries around the world. But we think that the transition to renewable energy is set to pick up speed rapidly - renewables are now competitive with fossil fuels in terms of cost. Consumers are demanding that this happen, and are voting with their feet as demand for electric vehicles (EVs), for example, soars."

I’m deeply sceptical that if a full cost-benefit analysis was undertaken, renewable sources of energy really have now reached all-in cost parity with fossil fuels. But if we take the best-case scenario, that the claim is indeed true, then businesses will voluntarily switch to renewable energy for any new venture, and consumers will follow suit by reaping the benefits of lower prices. In the meantime, if that reduces demand for oil, natural gas and coal, prices for fossil fuels will drop, so that they will either become the more economically efficient source of energy again, or renewables will win out, and the greens will be happy.

Either way, the price system associated with supply and demand will be the driver in consumer activity. Both businesses and consumers have an incentive to operate under the law of parsimony, using the fewest and cheapest resources possible – so if it really is true that renewables are now price competitive with fossil fuels in terms of cost, it doesn’t leave governments with much else to do here. The greens can enjoy a market-led efficiency that favours renewables.

But alas, I suspect that’s not the full story – and this highlights why I’m always going on about requiring a full cost-benefit analysis that factors in *all* considerations. Firstly, the article makes no mention of the cost of all business switching from fossil fuels to renewables – which will almost certainly prove cost-ineffective. If renewables really are now price competitive with fossil fuels in terms of cost, then there is incentive for new businesses and future investments to switch to renewables - but that does not mean businesses whose heavy capital investments are currently in fossil fuels will benefit from switching.

Secondly, I strongly suspect in typical sleight-of-hand manipulation from green commentators that the claim that renewables are now price competitive with fossil fuels is really a false economy, because I’ll wager that this analysis totally ignores all the taxpayers’ costs that have been lost in the renewable energy crony capitalist sector, where rent-seeking, lobbying and misallocation of resources is rife.

For example, we read from Mark Lacey that “since 2013 more than $1 trillion has been invested in renewable energy around the world and the industry now provides nearly 10 million jobs.” – and by ‘invested’ they always really mean a lot of that is taxpayer money that has been taken from the public to fund the costs of the renewable energy sector, which therefore does not demonstrate that it is providing value. Value is not demonstrated when money has to be taken from people in order to pay for things. The author makes an inadvertent back-handed hint at this when he says “Of course, renewables have been around for a while, but they have either lacked government support, or proved too expensive, or consumer demand hasn’t been there.” Quite. The taxpayer money that was pumped into these projects was done so precisely because they lacked support and would otherwise be too expensive.

I remember reading a New York Times story that celebrated the fact the solar industry employs far more Americans than wind or coal: 374,000 in solar compared with 100,000 in wind, 160,000 in coal mining and coal-fired power generation, and narrowly behind natural gas, which employs 398,000 workers (in gas production, electricity generation, and petrochemicals). The article writer was trying to insist that this must be a good thing for solar power, because it demonstrates how important solar power is in creating jobs. Alas, anyone who understands economics would not reason this way - they'd instead reason that solar power presently shows itself to be a pretty unresourceful and inefficient part of the energy industry.

And once you then compare number of workers to energy output as a percentage, things look even worse for solar energy. 398,000 natural gas workers amounts to 33.8% of all electricity generated in the United States and 160,000 coal employees amounts to 30.4%, whereas 374,000 solar workers amounts to just 0.9% of total electricity. If you try to break that down to electricity generated per worker, then coal generates 7,745 megawatt hours of electricity per worker, natural gas is 3,812, and solar is a measly 98 megawatt hours of electricity per worker. That is to say, producing the same amount of electricity requires 1 coal worker, 2 natural gas workers and a whopping 79 solar workers.

To put that into perspective, it would be like having three large supermarket chains across the country, producing the same output, but Supermarket A does so with 300,000 workers, Supermarket B does so with 600,000 workers, and Supermarket C doing so with 23.7 million workers, and the state subsidising Supermarket C because it thinks it provides better value than A and B. Solar energy is, at present*, showing itself to be a wasteful and inefficient method of producing energy, but people won't get why until they understand that jobs are a cost of doing something, because they are the price we pay for people's labour.

Finally, the Mark Lacey shows a chart, claiming that solar and onshore wind energy are now competitive with oil & gas:
 
 

 
 

As I’ve said, whenever that’s true – great news!! - businesses will voluntarily switch, and the greens will be happy. But the analysis is more complex than the author suggests. Saying “solar and onshore wind energy are now competitive with oil & gas” is just too simplistic – especially if he’s thinking of an energy revolution. Firstly, solar and wind cannot currently compete with fossil fuels as resources that can power all the businesses in the world economy. So they are not competitive with oil and gas with regard to most of the world’s industry. It’s a bit like saying the paddling pool in my back garden is big enough to provide water-based fun for my kids, therefore all the world’s kids can come and use my pool. It’s just not true – there’s a scaling problem – and similarly, solar and wind may be cost effective in a few cases (although that is still unproven at this stage, see above) but it’s a false comparison to say they are more competitive than coal and gas, because they are not yet wholly competitive with coal and gas in terms of resourcing the world’s industries.

On top of that, of course, is the fact that misallocating value-robbing resources into renewables will very likely impede the innovations that lead to the most efficient technological solutions. Subsidising renewables gives a false impression of their viability, and it disincentivises innovators from investing in proper cost-effective solutions. What’s the point of risking capital investment in innovative market-based solutions that will actually provide value when special handouts from the government to artificially valuable renewable alternatives make the race look about even, when really, minus the taxpayer handouts, renewables fall well short? There’s no point risking your investment in a race to make us greener against an opponent with an unfair advantage. You may be a faster cyclist, but your competitor has lobbied for a government hand out to turn his bike into a motor-powered machine, hiding the fact that he is a lot slower and less fit than you are.
 
That analogy is a bit like what the general public’s impression of the renewables vs. fossil fuel debate – they are seeing a false economy that robs entrepreneurs of as such incentive and motivation to use trade and competition as vehicles for making us markets greener. How ridiculous, not to mention duplicitous, to claim that solar is as efficient as fossil fuels and neglect to mention the massive governmental subsidies/taxpayer surcharges that fund this rentseeking. Is it dishonesty or stupidity? Either way it’s the same result. On the whole, then, your article is a textbook example of how not to reason, and how to wantonly fail in attempting a cost-benefit analysis.
Given that the present day redistributive aim is always to enable the better off to help the worse off, I’ve argued before that the majority of our weight should be put on helping present day poor people, and that we should put very little emphasis on future people who will be a lot better off than we are.  That seems obviously right to me, at least as strongly as the counter-proposition – that we should rob present day poorer people for the future richer people – seems obviously wrong.
 
Alongside that is the logical corollary: live with the costs that come alongside the much greater benefits of our industrial progression, and allow the freedom of exchanges of ideas to carry on uninhibited in solving the problems we face. There is no system we know of that works better – so accepting global warming and adjusting to the changes through the natural mechanism of the price system seems fairly obviously cheaper, more efficient, safer, less risky and less damaging than impeding innovation and slowing down progress with policies of which we hardly understand the costs.
 
 

 

 

 


 





 
 
 
 

 
 

 

 



 

Monday, 29 July 2019

Turning Up The Heat On Climate Change: Has No One Ever Considered That Global Warming Might Be A Good Thing?


Recently I wrote a paper explaining why I think the politics associated with climate change is both bad economics and bad philosophy. That paper was a mix of my overall theoretical interpretation of how reality operates, and the empirical facts that we observe through an economic lens when considering highly complex societies. I will be sharing that paper soon, albeit selectively - and not, I'm afraid, on this blog (for more details on that, you can email me - see the right hand side bar).

On the political side of this topic, the view I've always had - something that seems alarmingly obvious to me, but just alarming to environmentalists - is that the carbon emissions that have caused the anthropogenic parts of climate change confer astronomically more benefits on the world than they do costs, and you have to be rather short-sighted or wilfully blind to not realise this. So, then, this evening I saw a paper from Matt Ridley that caught my attention, about why he thinks climate change has done more good than harm. When he isn't talking about God or spurious notions of chance and randomness in biological evolution, I find he often talks sense - and a brief digest of his work leads me to agree with his views on global warming.

Exploring some of Ridley's sources led me to some further empirical data surrounding climate change, where even the scientific consensus has it that climate change is nothing like the emergency many fear it is, and that it is actually more beneficial to the world than it is costly. Incidentally, I wonder if anyone in the environmentalist camp has ever even considered whether global warming may actually be a net benefit, especially as the cold seems to have historically (and presently) been a much more inhibiting force to our progress and our survival than warmth.

Professor Richard Tol (do Google his work - there's plenty of it) has perhaps done the most of anyone I've researched to show how when you factor in the economic, the ecological, the humanitarian and the financial factors, there is an overall positive effect in climate change. He arrived at this conclusion after undertaking 14 different studies of the effects of future climate trends. One of professor Tol's key findings is that climate change would be beneficial up to 2.2˚C of warming from 2009 (when his paper was written). Some say those temperatures may not be reached until the end of the century, some say even longer. The IPCC predicts we will reach that temperature increase by 2080. This means that even at worst case scenario, global warming will continue to be of net benefit for another 60 years. So it's not exactly a climate emergency, is it? And even if it the case that global warming will only benefit us for another 60 years (assuming current conditions) then the people who will have to deal with in 2080 will be about nine times as rich as we are today (assuming economic growth continues on its present trajectory).

This is like a cherry on the top of my cake: you see, my paper only went so far as to say that even if climate change is doing more intrinsic harm than good from a relatively isolated perspective, once you factor in all the economic and scientific benefits to the equation, we sit on a net positive. But further research indicates that even the changing climate itself has engendered more positives than negatives. That said, while I'm encouraged by Richard Tol's research, I think he slightly underestimates the mood for optimism by making a fairly big underestimation himself. He talks of global warming possibly being a problem by the time the planet undergoes 2.2˚C of warming (in 2080) without paying enough regard to just how much better equipped we'll be in 60 years from now to tackle perceived problems in 2009 (or even 2019). As an economist who mainly focuses on the cost-benefit analyses to do with climate change - trying to factor in all matters of consideration - digging deeper in to the scientific research (which isn't all that important, by the way, because these are largely economic questions, not scientific ones) has been encouraging to my cause.

This has always been a strange solecism from climate change alarmists too: Look at how the world has gone from 1919 to 2019. Nobody sane thinks that the world's population hasn't benefitted immensely from industrial progression and technological advancements alongside a changing climate during the past 100 years. So given that we are richer and more advanced in this day than in 1919, why are so many people unconvinced that the world's population won't benefit immensely from industrial progression and technological advancements alongside a changing climate in the next 100 years? Moreover, given that we in 2019 have most of the advancements to have been able to solve the majority of economic problems people in 1919 faced, why are we not more confident of having similar capacities 60 years henceforward, given that we are starting from an even stronger place, and that we have far more people on the planet to help solve the problems that might arise? We seem drastically unfair on ourselves when it comes to forecasting our ability to work together to solve problems.

Here's another angle on the benefits from Matt Ridley:

"The chief benefits of global warming include: fewer winter deaths; lower energy costs; better agricultural yields; probably fewer droughts; maybe richer biodiversity. It is a little-known fact that winter deaths exceed summer deaths — not just in countries like Britain but also those with very warm summers, including Greece. Both Britain and Greece see mortality rates rise by 18 per cent each winter. Especially cold winters cause a rise in heart failures far greater than the rise in deaths during heatwaves. Cold, not the heat, is the biggest killer. For the last decade, Brits have been dying from the cold at the average rate of 29,000 excess deaths each winter. Compare this to the heatwave ten years ago, which claimed 15,000 lives in France and just 2,000 in Britain. In the ten years since, there has been no summer death spike at all. Excess winter deaths hit the poor harder than the rich for the obvious reason: they cannot afford heating. And it is not just those at risk who benefit from moderate warming. Global warming has so far cut heating bills more than it has raised cooling bills. If it resumes after its current 17-year hiatus, and if the energy efficiency of our homes improves, then at some point the cost of cooling probably will exceed the cost of heating — probably from about 2035, Prof Tol estimates."

And then there are the myths about the weather:

"Well yes, you may argue, but what about all the weather disasters caused by climate change? Entirely mythical — so far. The latest IPCC report is admirably frank about this, reporting ‘no significant observed trends in global tropical cyclone frequency over the past century … lack of evidence and thus low confidence regarding the sign of trend in the magnitude and/or frequency offloads on a global scale … low confidence in observed trends in small-scale severe weather phenomena such as hail and thunderstorms’. In fact, the death rate from droughts, floods and storms has dropped by 98 per cent since the 1920s, according to a careful study by the independent scholar Indur Goklany. Not because weather has become less dangerous but because people have gained better protection as they got richer: witness the remarkable success of cyclone warnings in India last week. "

Not only is it the case that the climate change alarmists are trying to kill the geese that are laying the golden eggs that really are sorting out the problems they want to solve, the situation is even worse. The policies they are instituting to fight climate change are doing mass harm around the world, especially in the world's poorest countries. It's basic econ 101 that the cheaper and more readily available food and fuel is to the world's poorest citizens, the better their lives will be. Yet climate change policies drive up prices for energy, fuel and food, and hinder competition to provide these things at lower prices - and this has devastating effects on young people trying to eat in northern Africa right through to old people trying to heat their home in northern England.

I learned from Bjorn Lomborg that the European Union will pay £165 billion for its current climate policies each and every year for the next 87 years, and from Matt Ridley that Britain’s climate policies - subsidising windmills, wood-burners, anaerobic digesters, electric vehicles and all the rest - is due to cost us £1.8 trillion over the course of this century. And here's the worst statistic of all - consensual expertise has it that every £100 spent fighting climate change brings just £3 of benefit. Furthermore, the efforts to mitigate climate change through campaigns for emissions reductions are having a negative effect on food security, due to indirect impacts on prices and supplies of key agricultural commodities.

All this stuff boils down to basic economics really, and a shocking indictment of the climate change hysteria that it seeping into our politics. Carbon emissions happen alongside of, and because of, our industrial achievements and or economic growth. Therefore setting an arbitrary date to produce net zero carbon emissions is foolish because the cost-benefit analysis is far too complex to be pinned to a date that's thought up on a whim by politicians. You can't artificially reduce carbon through some political fiat without destroying capital, undermining investments and harming value-creating production. This is a solid argument for not imposing short-sighted targets, but instead leaving it to highly competitive industries to become greener through the natural mechanisms of competition and innovation in relationship with the law of parsimony - something they've been doing quite naturally, and remarkably well, for the past 150 years.

I have no objection to the notion that some of the scientific predictions may come to pass - but even if they all come to pass, the alarmists are grossly underestimating the future technological advancements, and how our future selves will be equipped to respond. Here's a better way to think of it. There are certain, immense benefits to our industrial activity, some certain costs, some other probable costs and some other probable benefits - and anyone who tells you they've figured out the net costs and benefits for the next few decades in this complex equation of numerous unknowns, and can then show that there is a net cost and that they have a solution to it, is being dishonest and somewhat delusional. Maybe we should confer tax breaks to the biggest carbon emitting businesses, not tax penalties. It sounds absurd, and perhaps it is, but it may not be. Our industrial and technological revolutions have conferred so many benefits on the planet that it seems more imprudent to punish and discourage them than to encourage them, as long as we ensure that negative externalities are penalised whenever the action is efficient. 

Wednesday, 24 July 2019

Toilet Seat Economics: Lifting The Lid On The Optimal Marital Policy


Every married couple knows that the most important question of all isn't 'Why is there something rather than nothing?", or "What is reality?" or "Will we ever fully understand consciousness?" - it is this epic question:

"Should men put the toilet seat down after they'd had a wee?"

I jotted down some thoughts, and my friend Tim Reeves commented. For anyone interested, here is our discussion:

Toilet Seat Economics
JK: You know the scene; Jack and Jill get married, and they have that discussion about what the toilet seat policy should be in the marital home. Jill usually says "Please leave it down after you use it", and Jack can respond in different ways. He can refuse in a carefree way (that's not going to help the relationship), he can acquiesce in a resentful way (that's not the best response either), he can refuse in a logical way (more on that in a moment) or he can acquiesce in a cooperative way because he loves her. One of the latter two ways is best - and I'm going to explore which one it is.

This kind of scenario is often thought of in terms of game theory strategy - but husbands who think this way are making an amateur mistake. In game theory, a state called the Nash equilibrium occurs when no agent in a situation can improve their strategy by unilaterally changing their actions. The optimal outcome of a situation is where there is no incentive to deviate from the initial strategy once he or she knows their opponent's decision. In the well known prisoner's dilemma, for example, the Nash equilibrium is not for both of you to remain silent. The Nash equilibrium in the prisoner's dilemma is for both you and Jill to betray each other, because even though mutually staying silent leads to a better outcome, if one chooses betrayal and the other stays silent, one of you has a worse outcome. In other words, the rational decision is to betray, because betraying can't make your situation worse, but it might make it better.

This also shows that rational decisions don't always lead to good outcomes. Imagine you're Jack. If Jill betrays you and you remain silent, you get three years in prison by not betraying Jill, and two years in prison by betraying her. Therefore it's better for you if you betray Jill. If Jill stays silent and you betray Jill you walk free, and if you also remain silent you receive one year in prison. Therefore it's still better if you betray Jill, and the Nash equilibrium occurs if you both betray each other. However, a husband and wife with a healthy relationship are a cooperative unit, not in competition, so Nash equilibria does not apply here, because it only applies when two agents are in competition.

TR: Agreed. What is “rational” here really depends on whether or not we are dealing with a single organism or two competing organisms. For organically joined players the cooperative strategy is the rational one, but for two separate competing organisms betrayal is the rational choice.

JK: And thankfully, married life need not be like a prisoner's dilemma - it should be an opportunity to bless each other, although sometimes the mathematics is fun too. To see why the toilet seat issue is an even bigger chance to bless each other than is often realised, let's assume for a second that the husband and wife are treating the toilet seat issue in a competitive prisoner's dilemma-style scenario. In competition, where the strategy is to touch the toilet seat as infrequently as possible, you'll find that acquiescing to the lady's request to always leave the toilet seat down is inefficient. Leaving the toilet seat the same as after you've used it is the most efficient system.

Here's why. If you leave it always down then any time the man goes consecutively he is inconvenienced by having to move it up again, even though he used it last. Similarly if you leave it always up, any time the woman goes consecutively she is inconvenienced by having to move it down again. Leaving it always down is inefficient to males; leaving it always up is inefficient to females; and leaving as you used it the most efficient system.

But we are only looking at this situation from the perspective of minimising the joint total cost, where cost is touching the toilet seat unnecessarily. The mathematics is fairly easy to enumerate on this: assuming for simplicity that both Jack and Jill use the toilet exactly the same number of times, then if both Jack and Jill leave the seat up every time they use it, both will touch it the most, and Jill will touch it about six times more than Jack, making it the least efficient of all. If the decision was decided by a coin toss, then both Jack and Jill should touch it roughly equal number of times, but they will jointly touch it the second most occurrences.

If Jack leaves it the opposite of how he found it, he will touch it about 75% of the time, and Jill 25% of the time; If Jill leaves the opposite of how she found it, she will touch it about 75% of the time, and Jack 25% of the time - and in both cases they will jointly touch it less than the two cases above. The last option though - leaving it as you last used it - is the most efficient way to minimise the joint total cost. Because Jill only needs it down, and Jack needs it both up and down, he will touch it a little more often than Jill will, but they will both jointly touch it the least often.

However, all this only factors in the scenario that Jack and Jill go equally and alternatively. If we allow for the fact that for all sorts of reasons, like different liquid consumption, and different times they are in the house, there will be many times when Jack and Jill will go consecutively, and that's even stronger argument for leaving it as you last used it. Take an extreme case: suppose Jack drinks lots of water and goes to urinate 5 times for every 1 time that Jill goes, then a policy in which he put the seat down every time for Jill means he is putting it down and then back up again 4 times, with him being the only one who has used it during that time.

Conclusion: leaving it as you last used it is the best policy for Jack and Jill.

Now, here's the rub: it's not quite that simple, because love is about more than logical reasoning - it is about putting each other first. A couple whose strategy was simply to minimise the joint total costs would quite naturally adopt the policy of leaving the toilet seat as you last used it.

TR: Conventional water closets get visited by two kinds of people. Namely “Down Persons” (=D) and “Up Persons”. You notice that I haven’t distinguished between male and female. When a male goes to the toilet he can be in either an “up” state or a “down” state; so as far as toilet usage is concerned he’s two different people in the up state and down states. Because we are thinking of the overall organic economy of the household we need not make the distinction between male and female just yet; in fact it’s a distraction from the core mathematics. So if we assume that Up and Down persons visit the cubicle in some pattern of visits we can represent that pattern as something like this:

DDDDDUDDUUDDDUDDDDDUDDDDDUUUD….etc

The troublesome configurations are the pairs UD and DU as they entail the expenditure of energy and time by the household in order to change the state of the toilet seat. Interesting to note that it doesn’t matter who puts the seat up or down as the expenditure in energy & time is the same.  A D-person could put the seat up in advance just prior to the visit of a U-person. Or alternatively a U person visiting the cubicle could put the seat up after a D person has used it. (It’s contrariwise for the configuration UD, of course) The point is that in terms of time and energy it doesn’t make any difference whether U or D makes the necessary changes to the state of the toilet seat.

But there is a big “but” with what I have just said: It assumes that the pattern of visits is predictable to the extent that a householder knows whether the next visitor is an Up or a Down. This assumption, of course breaks down if the pattern of visits is random, in which case a cubicle user will not know whether the next user is U or D.

So what is the most household efficient strategy if the pattern is random? In this case the householder doesn’t know whether the next visitor is a U or a D. Hence if a householder changes the state of the seat after using it in preparation for the next visitor this may well be wasted time and energy, because the next visitor who comes in at random may have to wastefully change its state back to what it was. Because a user cannot anticipate whether the next user is a D or a U that user is not the best person to change the state of the seat because that state may have to be undone. The best person is of course the next person who visits the cubicle because they obviously know their requirements best and therefore no tricky precognition is needed by the previous visitor!

So to summarise, I agree that your strategy, which involves the last visitor leaving the toilet seat in the state he/she used it, is the most efficient scenario timewise and energetically.

JK: Moving on from mere economic efficiency to blissful marriage efficiency, a good strategy would be to supersede the good strategy with a better strategy whereby the husband insists on putting the toilet seat down for his wife. One objection might be that if the basis of a successful marriage is for each to put the other one first, then letting Jack put the toilet seat down every time is to make him complicit in an erroneous cost-benefit scenario, and that is not really an example of Jill putting his needs first.

TR: I’d go along with the general sentiment here that if “putting the other first” leads to wasteful inefficient scenarios it’s not actually that “loving”. After all, the overall household economy affects both players and if wasteful practices are adopted all parties can be adversely affected in the long term. So we are looking for efficient cooperative strategies. However there are other factors at work. Toilet seat changes involve very little energy and time and so the extra energy and time used by, say, U putting the seat down for D may perhaps be worthwhile for relationship purposes and help cement ties which could be of overwhelming concern in an organic whole that depends on  a cooperative household economy.

JK: The way to optimise this situation in accordance with mutual regard for the other, then, is to have a discussion with your beloved and agree on what is most important to them about this scenario, and who cares the most (because it will vary couple to couple). Because economics is primarily a study of human behaviour, and human behaviour is conditioned by our feelings, then your optimal system in the marital home must factor in levels of importance for each beloved. For example, in a typical marriage I'd predict that a lady cares a lot more about not having to touch the toilet seat than a man does about having to lift it up, so the most maritally efficient, and therefore also the most economically efficient in this case, is for Jack to show love and put it down after use, for Jill to love him gratefully in return for doing so, and for her to forgive him if he forgets from time to time, because she knows his intentions are the best for her. 
 
 

Sunday, 14 July 2019

Why We Should Be Wary Of Carbon Tax


Being 6ft 7, I don’t have much leg room on planes. This was even more apparent on my night flight back from America in 2017, when the passenger in front of me wanted to recline his chair into a sleeping position, and I had to apologetically advise that this would not be possible as my leg room was already at full capacity. Most people would agree that having this discomfort imposed on me would be unfair to me, and that the passenger in front of me should save my discomfort, or else compensate me for it. This is what is known in economics as a ‘negative externality’ - costs imposed on somebody else that circumvents market signals without due compensation for the costs.

Pollution is another ‘negative externality’ in society - and one that many people want to see drastically reduced. To know if we should reduce pollution, we would need to know what the right amount of pollution is - and that is a complex analysis that we oversimplify at our peril. Consider a factory that emits sulfer oxides in the air. Obviously sulfer oxide emissions affect the pollution levels, but that's not the same as saying that they are bad. Technically, breathing pollutes the environment, but no one sensible suggests we should stop breathing. If a factory is turning a profit, it is creating value in society (because consumers prefer spending on the products to keeping their money), so the right question to ask is whether the pollution the factory emits has costs that outweigh the benefits of the consumer surplus the factory affords to society in total production (not to mention the jobs it creates too) or whether the benefits of the factory outweigh the cost of the pollution.

How can we tell which it is? Here's how; if the negative spillover effects of the pollution are less than the cost of preventing it, the pollution produces more gains than losses. If the negative spillover effects of the pollution are more than the cost of preventing it, the pollution probably should be penalised. The point so many people are missing is that sometimes pollution confers net gains on society (actually, my instinct is it usually does).

Returning to my night flight, here's an essential part of the story that is usually missed: it wasn’t just the case that the passenger in front of me was imposing a cost on me if he reclined, I too was imposing a cost on him by being 6ft 7 and sitting right behind him. This is what is meant by the notion that negative externalities are symmetrical. The passenger in front of me was inconvenienced by my height, just as I was inconvenienced by his desire to recline. And apart from a highly subjective recourse to Kamm’s Principle of Permissible Harm, which is the notion that one may endorse some forms of harm occurring but only if such harm is an effect or an aspect of the greater good itself, there isn’t really a sound way outside of market signals to established whose inconvenience should take precedence over the other’s. Naturally, the price system goes a long way towards solving these problems in advance - for example, by making more desirable things like seats with more leg room more expensive to match their increased demand. As my ticket had already been purchased, the way I rectified the problem was by asking if I could be moved to a seat with more leg room and no passengers in front of me - and the stewardess was happy to acquiesce, making all parties happy with the arrangement.

What I'm conveying here is the Coase theorem*, which basically says, we should never assume that the policy should be "Stop Fred from harming Bob" or "Stop Bob from harming Fred" - we need to work out whether we should allow Bob to harm Fred or Fred to harm Bob. Until we know more details, an abstract argument for preferring Bob over Fred is equally rational for preferring Fred over Bob - the devil is in the detail. Coase doesn't gainsay the value of carbon (Pigouvian) taxes per se, but he does teach us that we need to base the decision on evidence not on logic alone. Should we tax a polluter? Maybe, maybe not. Pollution causes harm to others, but so does taxation. The proper cost-benefit analysis is to consider the cost of failing to tax an emission (more pollution), against the cost of taxing an emission (the stuff we forgo because of the tax), and try to ascertain which is the bigger net cost.

To ensure a balanced enquiry, if I was steelmanning here, and trying to find the best argument for carbon taxes, this 5 point argument is about as good a case as I can make:

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 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 might do 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.

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) The conclusion is that green taxes will do some good to bring about a phasing out of environmentally unfriendly activities.

Are they strong enough arguments to justify carbon taxes? My instincts tell me no - so let's explore those instincts more fully. The problem with carbon taxes in the present day is that if carbon taxes won't really do any overall good, they are probably a waste of time altogether. This may not seem 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 simply 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 probably has 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 probably 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 would 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 EU aside), 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 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.

In actual fact, the dialectic between 'If it makes no overall difference then small interventions will be too costly' plays out exactly this way with what’s called a 'cap and trade' policy, where a government issues annual permits that allow companies to emit the amount of carbon dioxide the cap allows. Companies are taxed if they exceed the permit’s level of emissions, and if they reduce their emissions they can trade unused permits to other companies. The rationale being that as the government lowers the number of permits each year, those permits become more expensive, incentivising companies over the years to invest in clean technology.

Alas, whoever devised this scheme isn’t very far-reaching when it comes to economics. Firstly, like every other state-fixed regulation, the government is bound to get the limit wrong, as it has no clue how much carbon businesses should emit. If their cap is too high it will do little good, and will probably even create an anchoring effect that artificially raises emissions. If the cap is too low it will destroy businesses and artificially raise energy prices to the detriment of the industry and consumers. Secondly, it can disadvantage small businesses who can’t afford to buy a permit, and stifle competition too. Thirdly, (for complex reasons we won’t elaborate on in this blog post) it is easier to calculate carbon tax based on per tonne emissions than it is calculating the optimum number of cap and trade permits.

Here's something else a lot of people get wrong about carbon tax - it is frequently assumed to be a method of reducing pollution, but that's not quite right. Even if there are conditions under which a carbon tax is not as bad as a cap and trade policy, a carbon tax is not a means of reducing emissions down to a nominal figure; it is supposed to be a tool for maximising utility. That is, carbon taxes help us incorporate negative externalities into the price system of a free market whereby polluters carry the costs of their negative externalities, but also whereby the price reaches equilibrium as the costs of pollution are measured accurately against the benefits. That way, those negative externalities are compensated for by the fact that they increase utility to a level greater than their costs. For example, a timber factory and a roadside diner on the outskirts of a city add some pollution to the environment, but they make up for those negative externalities by providing goods and services that people want.

Where they could be a benefit is when carbon taxes intervene in the price system to ensure that future costs of transactions are thought to be worth paying for present benefits. The rate of carbon tax is roughly commensurate with the future cost of pollution, incorporated into the price system to justify the benefits now – it should technically be a tax that attempts to ascertain the benefits of pollution, not the costs. Carbon taxes are far from simply being about lowering emissions, although they will likely change future behaviour as businesses innovate to be greener with improved technology.

Two other big problems with carbon taxes
The first problem is the way carbon taxes are used by politicians to make the state bigger at our expense and for their own gain. Here we can elicit a popular term coined by Bruce Yandle called Bootleggers and Baptists, which is about regulations that provide self-interested benefits for both the regulators and for those thought to be victims of the regulations. It is based on the notion that Baptists support Sunday closing hours, but so do Bootleggers, because if local bars and off-licenses are closed, Bootleggers gain too. Here's how it works. Sunday closing hours benefit both Bootleggers and Baptists, while at the same time purporting to serve the public interests - and the green regulations are of a similar nature, as well as being very short-sighted and hugely damaging. Climate change alarmists naturally support heavy green regulations - because it furthers their own agenda, and enables them to cream off crony capitalist subsidies - but so do some of the biggest polluters too because some of the regulations help shut out competition, which a crony capitalist misallocation of resources.

The second problem is that carbon tax does not really punish polluting companies very much; it tends to punish consumers, who are usually the poorest people in society. When a company is taxed - whether it is carbon tax, corporation tax, or labour tax (the minimum wage) - the cost of that tax cannot be borne by a company, because a company is made up of individuals, and only individuals can bear the cost of taxes. When companies are taxed, the cost either has to be borne by shareholders (with lower dividends), or employees (with decreased wages), or by customers (with increased prices of goods or services). Like with corporation tax and tax on labour, the cost of carbon taxes are primarily borne by customers or employees to avoid being borne by shareholders, because a company will always do its best to pass additional tax costs on to employees or consumers. If the cost of taxes ultimately falls on individuals in the form of higher prices of consumption and lower wages (or in some cases increased unemployment) then a carbon tax policy that tries to hurt corporations who pollute is simply a tax policy that harms the people who are most struggling to get by. You may still support carbon taxes on the basis that consumers are contributing to high-pollution goods and services, and that they are paying their fair share - but it’s a bad argument for saying that carbon taxes make companies greener, because what they mostly do is make poor people poorer.

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 ambiguous 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 could 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 as I've shown, 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. In October 2018, many MPs wanted to ban all of the standard petrol or diesel driven cars by 2040 and allow only vanishingly low emission vehicles on the roads (presumably electric and solar vehicles). 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 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.

Closing thought
The upshot of all this is that when the state intervenes to mitigate the extent to which humans pollute, the intervention will only be beneficial if it outweighs the costs of intervention - and my instinct is, it usually does not. With carbon tax, politicians are trying to prevent future damage by minimising present benefits. But if present and future benefits of pollution outweigh present and future costs - and it seems pretty certain that they do (by a long way) - we should carry on enjoying them, and taxes and regulations imposed upon industrial activity are more harmful than good. 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 impede utility - and I have never had a reason to change my mind.  

The scientific and technological capabilities we have acquired in the past few hundred years will almost certainly make a better job of tackling externalities than carbon taxes, especially if humans are given the freedom to cooperate in problem-solving. Our science, technology and market activity are already making huge differences, and they are the progression trinity that will ultimately bring about the future changes needed. The entire nexus of the global economy is a physical system which is all the time tending towards the principle of maximum efficiency. Although carbon taxes bring in revenue for politicians short-term (for a few decades maybe), the long-term indicators are that the market left to run by itself will naturally make us greener anyway. The reason being: businesses are already looking for the most efficient means of supplying customers using as little energy as possible, because in a highly competitive market it is in their interest to do so to remain profitable. The goal to reduce energy output has already come in various ways: replacement of human energy for machines, replacement of metal-based technology for higher intensity resources or carbon-cased materials, replacement of paper for digital devices, and so forth – and these are improvements in production that naturally improve business’s cost-effectiveness.

The transition from the paper revolution to the digital one required lots of burning of fossil fuels, equivalent to energy being driven into the system from outside, but all the time that external energy is helping the global economy tend towards a path to least resistance very similar to how thermodynamics operates in the natural world. As the old saying goes, you can't make an omelette without breaking a few eggs - and the eggs we've cracked since the Industrial Revolution, while not without some externalities, have done more to improve global standards of living than anything else in human history. Carbon taxes may lead to fewer emissions, but with carbon taxes, energy prices rise, resources are misallocated, innovation is impeded (including innovation that actually helps solve climate change), and many of the world's poorest people suffer as a consequence.

My instinct is that because prices have been changed to account for the increased emissions, the only investment that is needed is investment that is more economically viable than the current prices. The imminent effect of those price changes will tell us the best course of action. If, for example, our ability to augment our solar capacity enables that venture to be price competitive against our current carbon industries then consumers will respond to it. If it doesn't, they won't (that point alone illustrates how state interference will probably impede the process). The costs (present and future) of staying with our current carbon trends have already been factored into the increased prices of our externalities. We don't need to throw much taxpayers' money at it at all - because people's preferences for economic viability will drive this, as already happens in virtually every other market process. Consequently, compared with how the market engenders continually increased efficiency, I'm pretty sure that carbon taxes probably will turn out to have had only a much more negligible effect on lower energy output and more efficient use of resources than the free market, because the market is driven by efficiency far more than politicians with political interest. If there is a race to make us greener, politicians are more like the tortoise and the market is more like the hare.
 


 
* Externalities are based on incentives, as was most famously written about by English economist Arthur Cecil Pigou with his standard textbook examples of nineteenth century trains that threw off sparks that frequently ignited the crops on neighbouring farms, and of rabbits that would frequently eat the neighbouring lettuce farmers’ goods. Quite naturally, or so Pigou (and just about everyone else) thought, the railroad owners and farmers with rabbits had to feel the effects of their actions, so recompense was owed to the farmers with the ignited crops and the diminished lettuce supplies. But things aren’t quite so straightforward, because outside of economic expertise, most negative externalities are only narrowly considered from one person’s perspective and not the other. It’s here we need to elicit the Coase theorem – which was conceived by Nobel Prize winner Ronald Coase in 1960. The idea behind the Coase theorem is that negative externalities are not usually asymmetrically one-sided, they are symmetrical. This is what Ronald Coase theorised:
 
"Where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided."
 
In other words, the Coase theorem asserts that when rights are involved, parties naturally gravitate towards the most efficient and mutually beneficial outcome, with no prior blame or discrimination being automatically assumed. This dramatically changes the situations above, because Coase was smart enough to enquire as to why the railroad owners and farmers with rabbits were the ones causing inconvenience – why not the farmers with the ignited crops and the diminished lettuce supplies? If your trains set fire to my crops, then you have imposed a cost on me, but at the same time I have imposed a cost on you by having my crops near your railroad (which may be in the optimal location for transporting commuters from A to B). Moreover, I may very well use the train myself. Your rabbits are annoying me by eating my lettuce; but equally my lettuce is annoying you because it is causing your rabbits to eat them, which incurs the cost you are forced to pay me as compensation. Your nearby power plant burns fossil fuels and pollutes the air I breathe, but you shouldn’t bear all the pollution costs because you supply electricity to many of the places whose products I buy.
 
Remember, Coase wasn't looking to play the blame game; he was looking for an efficient set of inputs and outputs, regardless of how property rights are divided. In the case of the railroad and the fires, he was looking for a solution that benefits both, not who should reimburse who. If the farmer plants his crops at an optimal distance from the railtrack, then both may enjoy the most efficient outcome. The town has crops and train journeys, and no one is paying financial restitution or looking for ways to sue. Similarly the rabbit farmer can keep his rabbits in cages or secure ring-fences, the lettuce farmer could grow other things the rabbits won’t eat, or they could split the costs and build an impenetrable fence between their farms. The railroad/crops example showed a new way of looking at the situation; yes, if there were no railroad tracks there would be no crop fires, but equally if there were no crops that were so close to the tracks there would be no crop fires either.
 
 

 
 

 

Thursday, 4 July 2019

Me & Climate Change: I Guess Things Are About To Get Hot!!


Although I’ve made the occasional foray into climate change commentary over the past few years, with about 30 blog posts, I’ve been too preoccupied with all my other projects to give it the time it warrants. And for a while, it was never that pressing to me: a few years ago all you heard from environmentalists were marginal pseudoscientific utterings from the likes of Greenpeace, a few wacky Green party politicians, and the odd crass article from intellectual lightweights like Naomi Klein and George Monbiot. 

But in recent months there has been an explosion of green halfwittery, with militant, Gaia-venerating eco-warriors causing mass-disruption to public life, making ridiculous arguments for their cause, and propagating the most asinine beliefs I’ve heard in a long time. They are surely the most confused political group on the planet right now - and let's be honest, there are plenty of challengers to the claim of that distinction.  

Alas, their proliferation in numbers has really rather forced me to take more of an interest in them - they’ve kicked this particular gentle hornet’s nest - and forced me out to see what all the fuss is about. My inclination to take on this fight for climate change truth is (perhaps surprisingly) less about the public disruption these extremists cause - it’s actually more to do with the fact that the political establishment has been taken in by this nonsense to such an extent that climate change propaganda has become normalised in an intellectually anodyne culture, where politicians want to use global warming panic to increase taxes and to make the state bigger. I’m not especially alarmed by wacky climate change alarmists wanting to bring down capitalism - the world is full of people with crazy beliefs. But I am alarmed by these people when they freshen up, put on a suit, get elected and wield political power.

Here's something horrifying. Last night I read the transcripts of this week’s House of Lords debate about the proposal for Net Zero carbon by 2050 - which millions of the electorate seem to blindly support without the first thought of its consequences. What I read was truly shocking - so shocking, in fact, that it's a good contender for the dumbest policy in recent memory. Here it is. Despite the fact that Britain is responsible for just 1% of global emissions, many of our politicians are embracing a ‘Net Zero’ emissions target by 2050, even though estimates are that it will cost between 1-2% of GDP per annum. 1-2% of GDP per annum is a LOT of money!!! 

Spending 1-2% of GDP per annum on climate change for the next 30 years, adjusted for increasing GDP total size over the years, and including the £15 billion a year that we already spend on subsidies to renewable energy (adjusted for inflation) is going to cost the UK taxpayers around £1 trillion. For us low-key spenders, for whom things like a house is the most expensive thing we’ll ever buy, it’s not easy to picture just how much money £1 trillion is. To put the spending pledge into perspective - it is like agreeing to spend just over £91 million every day on climate change for the next 30 years!

To think about the inanity of this policy - I’ll break it down into steps:

1) 99% of the world’s global emissions are created outside of the UK.

2) The vast majority of those countries are not going to sign up for any ‘Net Zero’ program.

3) This means that even if the Net Zero program is a good idea (it isn’t, see below) it will have a very negligible effect on reducing the world’s carbon emissions - so much so that it will have almost no positive effects on the planet as a whole (for complex reasons, see below).

4) For a policy that will have almost no positive effects, the politicians want to force the British people to pay a staggering £91 million every day for the next 30 years (£1 trillion) and get almost nothing in return - money that could be spent on global development, on health, on social care, on tackling crime, or on the numerous other important services where it would actually do some good.

5) So, in conclusion, we are faced with politicians forcing us to cough up £91 million every day for the next 30 years to pay for a project to which we are only marginally connected, to which the majority of other countries would refuse to be signatories, and that would do almost no good in the world anyway.

Sound like a terrible idea? Yes, but it gets worse. Even if we generously started with the assumption that a ‘Net Zero’ emissions target by 2050 is a good thing for the world’s countries to be trying to achieve - the above points show clear-cut reasons why it’s a terrible idea for the UK to be committing to it, knowing it will do very little good, knowing most polluters won't join us, and knowing how many more pressing things there are on which to spend £1 trillion.

I know what some of you are thinking - ah, but this is just the start: if more countries get on board with this then a lot of good will come from the ‘Net Zero’ target. To which I’d say, firstly, that is entirely the wrong way to look at it; secondly, you can’t even begin to make such a plan without a proper cost-benefit analysis that includes both the benefits of carbon and the seen and unseen costs of climate change expenditure; thirdly, even if you provide a valid cost-benefit analysis, you need a detailed proposal of why Net Zero is the right amount of carbon emissions (as opposed to some other number) and why 2050 is the right date (as opposed to some other date).

Not only are none of these forthcoming, or ever factored in to the equation, there is never even a pretence that these considerations matter. Most people act like empty vessels into which any old political propaganda can be poured - and the politicians treat the mass population as though they really are that credulous. Politicians give the electorate the politics they deserve. But it just won’t do - and this kind of dangerous madness needs to be exposed, because it will cause more harm than you can possibly imagine.

On top of the miserable failure to acknowledge the necessary cost-benefit analysis that factors in ALL sides (that is, costs and benefits of carbon, and costs and benefits of anti-carbon green policies), there are three other principal mistakes here. One is misunderstanding how humans operate and the underlying engine that bootstraps those operations; two is a failure to understand how humans have done this well so far and how our past industrial limitations meant we actually couldn’t have done things very much better than we have; and the third is a quite shocking underestimation of how all those benefits stack up in comparison to the myopic, fantastical attempts to meddle with them.

The benefits carbon has bestowed on the world need little introduction - just about every single good thing that humans have done to improve the species' material well-being and standard of living has some connection (either proximal or distal) to carbon-based technology. Carbon benefits greatly outweigh carbon costs - by a factor of several orders of magnitude - of that there is no reasonable doubt. If you doubt it, there's too much you currently don't understand. Here's a picture that's worth about a thousand words:

But it goes deeper than that - because the benefits of carbon, and all harnessing of industrial and technological innovation, are nested in an even more important quality that we should mess with at our peril. Here's how it is. For nature to provide the highest efficiency possible and thus maximise growth and innovation (and poverty reduction, increased standards of living, etc), it requires the optimal level of freedom, because freedom means more ideas, more competition, more cooperation, and more problem-solving.

People get this in every other smaller way - they just fail to get it in the bigger ways. If you restrict the freedom of a car engine to run as it is designed to run, an ant colony, a bicycle chain, legs in a pair of trousers, or just about anything that has moving, variable constituents, the system or organism performs less effectively. Yet when it comes to things like human ingenuity, capital, work, and incentives to innovate, people suddenly become blind to the same principles they endorsed earlier - they suddenly become averse to optimal freedom, not just by wantonly calling for further suppressions of liberty, but by advocating policies and systems that restrict their freedoms in ways to which they are blind.

Now don't misunderstand me - no one here is endorsing an unfettered, chaotic freedom with zero rules or responsibilities (obviously!!). But the more centralised and uncompetitive something becomes, the less efficient and more wasteful it usually becomes - not just because its fitness suffers (although that's true too) but more so because of the opportunity costs in relation to less competition, reduced sharing of ideas, and fewer instances of innovation.

Everywhere you look you can see this is true. A service that is run by a state monopoly power lacks the fitness explosions seen in a highly competitive industry. A manager who only cares about her own opinion, and takes no feedback or input from her team, will have a less effective team. Government debt, deficits, bonds, fractional reserve money and centralised top-down banking are all methods of pooling the administration of capital, where resource-allocation is narrowed, and the freedom of the agents is severely restricted to a much smaller pool.

This negatively affects all of us - it is the biggest sleight of hand trick ever played on populations in the modern era - it is economic Stockholm syndrome. Here's a very obvious example: a quick Google search tells me that the government spends £39 billion a year on debt interest alone. Who do you think is going to pay for that? It is future generations. Locking them in to a future promise like that is tantamount to putting them in a pair of trousers that is 3 sizes too small for them - it severely restricts their freedom (I’ve got blog posts about some of these spillover effects in my Banking section).

One of the main benefits of optimal freedom is that the underlying engine of the price system is the most well-oiled it can be - because it is freedom that most effectively allocates resources and sets their prices in relation to supply and demand curves. Coasian bargaining also becomes most effective with optimal freedom, so even when there are externalities we claim not to like, as long as the transaction costs are sufficiently low, there will generally be a positive (although never perfect) amble across the Pareto frontier (that is to say, resources are allocated whereby we cannot make any agent better off without making at least one agent criterion worse off).

That is why I am deeply sceptical about climate change interventionist politics - and by deeply sceptical I mean I think it is one of the most confused, reactionary scams humans have ever invented. They just do not understand these above topics at all - and as a consequence, they get all the basics backwards. If they really do want to advance good things for the environment, and everyone in it, they should be embracing the above mechanisms of greater freedom to share ideas, to cooperate, and to maximise growth and innovation, because that is what really will do the trick better than anything else.

Even the well-intentioned folk who just want to live a bit less wastefully have been swept up in a vortex of hysteria, to the point that anything to do with the environment is all-but indistinguishable from political agenda and extremist dogma. That is to say, even if there are some grains of truth in the economics of environmentalism (which there are), they have made such a mess of things, annoyed so many people, and been so unreasonable in their dispensations that they are now completely devoid of credibility and utterly divested of integrity.

It isn’t just the case that freedom to exchange ideas leads to the greatest progress and increased standards of living - there is a converse effect that bad ideas, foolish political agendas and widespread misinformation makes progress harder and increased standards of living more protracted. Here’s why. As populations increase and become more widely interconnected, and as thoughts and ideas become less centralised in a decentralising nexus, the rate of idea-sharing increases, the power of communication and knowledge advances, and progress looks more like an exponential curve.

But when bad ideas pollute the epistemological landscape, and sub-standard reasoning muddies the waters, diversity of thinking is narrowed and propagated, and there is a clustering effect that creates choke points within the landscape of ideas and knowledge. Bad ideas don't just pollute the inner mind; they pollute the landscape for outer minds too, as concentrations of tribal thinking lead the in-group members astray, but also gravitationally attract outsiders who begin with ambivalence, but are looking for somewhere to belong, however foolish and damaging it may be.

The upshot of all this is that climate change alarmism isn't a fight I ever thought would be prominent enough to warrant very much mainstream participation. But it seems I'm going to have to dust down my pistols, buckle up my holster, and get on my horse to join the good fight - because this most reactionary, dangerous cult is here to stay for a while yet.
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