The unprecedented $60 trillion of costs of Arctic melting
Much ado about a new study published in Nature. Arctic melting could lead to methane emissions which would cost the world $60 trillion. This is an unprecedented danger say scientists. Sadly, whatever one thinks of the scinece in this, those damages aren't unprecedented at all. Indeed, they're already written into the costs which we use to worry about what to do over climate change.
But, they say, economists are missing the big picture. "Neither the World Economic Forum nor the International Monetary Fund currently recognise the economic danger of Arctic change. [They must] pay much more attention to this invisible time-bomb. The impacts of just one [giant "pulse" of methane] approaches the $70-tn value of the world economy in 2012", said Prof Gail Whiteman, at the Rotterdam School of Management and another author.
The problem with this assertion is that all of the standard estimations do indeed include damages like this. Let us take the Stern Review for example, that's the one that tends to be used as a benchmark (and is indeed the benchmark that these scientists have used). In that Stern Review, drawing from the estimates in the Special Report on Emissions Scenarios, the assumption is that the global economy will grow by some 5 to 11 times over the course of this coming century. Global GDP will be between $250 trillion and $550 trillion. Stern then says that the damages from climate change could be as much as 20% of this sum. That is, that GDP would have been in that range but will now be in the $200 to $400 trillion range. Note that that is his worst case argument.
And here we have an estimate that damages could be $60 trillion over a 50 years time period: say, $1 trillion a year with a bit of rounding. Or one half of one percent to one quarter of one percent of global GDP. We have already got this included in our top whack estimate of damages of 20% of future potential GDP.
All of which brings us to the real point at the heart of the entire climate change discussion. No, not whether it is happening or not: let's leave the range of possibility open from nothing is happening at all all the way through to the sort of disasters being predicted here. It is still true, wherever on that spectrum we are, that we want all humans over time to be just as rich as is possible. We are therefore trying to balance the costs of not doing something about climate change against the costs of trying to do something about climate change. And as these century long figures show there are significant costs to both, or at least potentially there are.
But we should be measuring the costs of doing something as against the loss in GDP which doing something will cause. Just as we should be measuring the costs of not doing anything against the cost that not doing anything will cause. It's worth trying to avoid such methane releases if the cost of doing so is less than the economic growth that will be foregone. Which is where throwing around numbers like $60 trillion becomes unfortunate. For it's a cost over many decades: $1 trillion a year is more reasonable to use. And compared to the benefits that economic growth is going to bring to our descendants that's however large it is in one manner, really rather a trivial figure.
Free markets for sustainability!
I expect we're all wearily familiar with the population prodnose. Those who comment (most often seen at Comment is Free but they do spread themselves around a bit), endlessly, along the lines that "this is the problem that cannot be mentioned, the rising population". And who then go on to suggest the compulsory sterilisation of anyone a little browner than they think people ought to be. With rather fewer fascistic overtones we get similar stuff from people like Johnny Porritt and the Optimum Population Trust. There's just too many people, too many of them are peasants who won't do what Baronets tell them to and it's all just appalling.
Very strangely indeed it's largely these same people who insist that there must be a plan to deal with this population thing. Despite the fact that population is one thing that free markets deal with very well indeed thank you very much. As Ron Bailey over at Reason points out:
The crucial point is that increasing economic liberty correlates with increasing life expectancies, and thus falling fertility rates. As data from the Heritage Foundation’s Economic Freedom Index shows, average life expectancy for free countries is over 80 years, whereas it’s just about 63 years in repressed countries.
The causal chain is as follows: economic freedom increases wealth: increased wealth leads to longer lifespans. Longer life spans for women reduce fertility rates (I know, you might think it works the other way: but it doesn't). Therefore economic freedom reduces population growth.
And there we have it: we don't need grand plans to sterilise everyone a racist wouldn't like to bring home to mother for tea. We don't need to pressure the peasantry into doing what an Old Etonian thinks they ought to. We just have to leave people to get on with it themselves. People generally like economic freedom, they certainly like increased wealth and longer lifepsans and the end result of all three is that population growth falls, falls to below replacement rate and thus the gross population falls over time.
No plans, no pressure, no coercion, just free markets and the rule of law saving the planet. Great, eh? Now if only we could get the population prodnoses to understand this....
Dearie me, oh dearie, dearie, me, do we have to have fools running the country?
Sigh:
Backing a report by CentreForum, the think tank, Sir Ian said that “many companies, especially the private equity infrastructure funds, have paid out excessive dividends to their owners”. He advocated the introduction of “some form of dividend control”, whereby “payments of dividends above those assumed by the regulator when setting price limits, would be accompanied by reductions in the tariffs paid by customers”.
No, absolutely not. Sir Ian has clearly forgotten what happens when you place those sorts of detailed restrictions upon regulated companies. They'll inflate their capital base, play around with loan interest, pay the management more: whenever you try to micromanage like this you'll find people gaming your micromanagement.
What we actually want to happen is how we did this regulating of prices immediately after privatisation. We set a target for prices (RPI plus or minus something, depending upon the industry) and then let everyone rip with capitalist glee as they slashed and burned through their overstuffed workforces. Or as I suppose I should put it, increased productivity to the benefit of all. They did indeed make vast profits in doing so. Now if we had just left them alone for all time this would not have been a good solution: but we didn't. We told them that their pricing regulatory structure would be reviewed after some years. And then, that's where we got them. Because we revised the regulated prices to take account of the productivity improvements they'd already made. And quite deliberately made sure that in the next period they lost those excessive profits they'd made in the first.
There's good reason to manage affairs this way as well. Sir Ian doesn't know what an "excessive dividend" is, nor do I. Nor do either of us have a clue as to how to increase the productivity in these companies and thus their profits. So, what we do is set prices (they are natural monopolies after all, we're not going to leave them alone entirely), then let them make as much money as they can for, perhaps, 7 years. They know how to increase their own productivity and so they do and they increase their profits. But we don't let them keep those for all time: we now reset after 7 years and see if they can do it again.
We're giving them the incentive to become more efficient and profitable: but the regulation of how much more grossly, fatcatterly, profitable they become lies in the reset of the regulated prices, not fiddling with dividends and rates of return inside the regulator period. For that fiddling removes the incentive for them to become more efficient, y'see?
We did in fact get the price regulatory process correct the first time around. We didn't set the right numbers, no, not at all: but we did get the process right. Go make as much money as you can for the next regulatory period. And the more you make the tighter the next set of regulations will be. This is the correct mixture of the necessary regulation over monopolists and the drive for greater efficiency.
Unintended consequences in everything
Home insulation promoted by the government may end up killing old people in their homes, apparently (hat-tip to Chris Snowdon):
Prof Chris Goodier, of Loughborough University's department of civil and building engineering, said it was vital that homes in the UK better insulated to help meet carbon emission targets and save on winter fuel bills.
But he said the risk of overheating had been overlooked in the "big rush to insulate and make homes airtight", particularly as more extreme weather events, including heatwaves, are being predicted for the UK by meteorologists.
"Overheating is like the little boy at the back of the class waving his hand. It is forgotten about because the other challenges are so big,"
This is nothing to sniff about. Back in 2003, a staggering 70,000 people died in heat-related deaths during a Europe-wide heatwave, partially caused by elderly people living in homes designed to withstand cold winters instead of extremely hot summers.
That heatwave was widely attributed to global warming, which the 'Green Deal' home insulation is meant to stop. But this sort of unintended consequence shows the danger of imposing any one 'solution' to problems in complex systems. If the 'solution' causes problems of its own, those problems will be compounded across a much wider area than if different 'solutions' had been allowed to emerge from the bottom up.
Where there are collective action problems like global warming, the simple solutions that adjust incentives and let the market try lots of little things out (like carbon taxes) beat the grand plans of Very Clever People who cannot possibly know the full consequences of their actions. Of course, even things like carbon taxes may have their own unintended consequences too.
Mongolia chooses right in plans for the future
Last Sunday saw Mongolia’s 6th Presidential election. I was glad to see the incumbent President, Tsakhia Elbegdorj, win with just over 50% of the vote. Mr Elbegdori, the candidate for the centre-right Democratic party, was heavily involved in the movement to end 70 years of Communist rule, which was finally successful in 1990. He has a good track record of loosening the grip of government on the country’s businesses, and he is passionately anti-corruption. Another of his achievements (in my opinion) is his work to abolish the death penalty.
It’s great to see an emerging democracy choosing to shrink the state. It may be unsurprising that the people want to get away from the Communist ideology of the past, but the false promises of socialism are always tempting. Mongolia has great mineral wealth, and everyone will want a slice of the pie, but the best way to get rich is through laissez-faire economics. The focus of the presidential race was on Oyu Tolgoi, a huge copper and gold mine: both of Mr Elbegdorj’s rivals advocated a renegotiation of the government’s contract with Australian mining giant Rio Tinto. But Rio Tinto has put a lot of investment into Oyu Tolgoi, and too much government involvement may cause problems. Mr Elbegdorj is more friendly to foreign investors, which bodes well for Monglia’s future.
The country has been doing well recently: this year it is the world’s fourth fastest-growing economy. Poverty has been decreasing, from 39.2% in 2010 to 29.8% in 2011. Of course, there are still obstacles to be overcome, but at the moment it looks as though Mongolia is in capable hands.
Think Piece: Regulation and the UK's energy market
Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers.
Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.
In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.
Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.
Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.
Oil price fixing – who the European Commission should question
The European Commission has launched an investigation into oil prices. They suspect that prices may have been artificially inflated in order to swindle motorists out of their cash.
They are right. And they should start their investigation at the grand offices located at 1 Horse Guards Road, London SW1A 2HQ. That's not the headquarters of Shell or BP, but the home of the UK government's Treasury. After all, more than half the price that motorists pay at the pump is in fact tax. The product itself costs about 48p a litre to produce and get to the pump. The retailer gets about 5p. But on top of that, there is fuel duty of 58p for a litre. And 20% VAT on top of all that. Indeed, because VAT is added to the whole price, including the fuel duty, motorists are actually paying a tax on a tax!
VAT, of course, was raised recently in order to help balance the government's books in the wake of its bail-out of the banks. So that explains part of the increase in prices. More comes from the 'fuel escalator' – the principle that fuel duty should rise by more than inflation, in an attempt to induce us to leave the car at home and save the planet. (Politicians are remarkably adept at picking our pockets while telling us it's for our own good.) The escalator forced up UK fuel prices from below the EU average, to make them now among the very highest in Europe. And the tax on fuel is now several times what any economist can justify as a fair charge for the carbon that vehicles emit.
The bottom line is that more than tax on motor fuel is more than 80p a litre. Which makes George Osborne's offer to 'stabilise' petrol prices by shaving 1p off the tax look rather feeble. If the European Commission wants to get to the heart of the great petrol price rip-off, they should immediately call the Chancellor in for questioning.
Fracking: compensate locals, not councils
Ministers are exploring various proposals to encourage local residents to accept fracking projects, reports the Financial Times. The ideas including offering people cheaper household energy.
This is exactly how planning should work, as the Adam Smith Institute explained in a conference and report back in the 1980s, and more recently in Planning in a Free Society. Developments such as airports, roads, quarries – and now fracking projects – may bring a wider benefit to the community but adversely impact local areas with noise, pollution, traffic congestion, and so on. The decision to give the go-ahead to such projects should not rest with some 'expert' planning bureaucrat. Instead, those proposing the development should compensate everyone affected by these 'spillover effects' for their losses.
Although the physical spillover effects of fracking might be limited, there are psychological spillovers too. There may be a chance that fracking could disturb the underground geology in ways that could damage property or pollute water systems - though fracking supporters argue that these are very unlikely and that they will even then diminish over time as academics and the professionals understand the process better through experience. Still, people fear the possible effects – and those fears must be compensated if fracking enterprises are to proceed with the goodwill, or at least toleration, of the community.
We proposed that any new development, which produces a planning gain to its proposers, should compensate the local losers. One can imagine a supermarket, say, that leads to local traffic problems as roads become congested. Those near the congestion should be compensated, and those less affected compensated less. It is not an exact computation, but at least it is better than people whose lives are blighted by some development having no redress.
Local authorities do, of course, try to tax developers of some of their 'planning gain'. But the system is totally corrupt. Petty officials bully people who want to extend their house or build a new house in their garden, implying that they must pay thousands to the council if there is any chance of their proposals being passed. Larger developers can find themselves being invited to pay for swimming pools or other large 'community' projects. Of course, it is local councillors and officials who benefit from this corrupt system, not the residents who are actually affected.
Get ready for shale
The prospects for hydrocarbon production on the British mainland seem stronger than ever. On 10 April, Professor Richard Davies of Durham University's Energy Institute published a paper stating that fracking is not a significant source of detectible seismic events. Meanwhile, over the last year, there has been a series of leaks of the forthcoming report by the British Geological Survey which is to raise the UK’s estimated reserves of shale gas by some 300 times.
This is welcome news as it paves the way for a secure, domestic, low-cost solution to the thorny problem of replacing the UK’s obsolescent capacity to generate electricity, with a low-carbon footprint feedstock. Many of the deposits are in the North, which would benefit from the investment; but they are also present in the south. In order to make the most of the opportunity, new policy is in order.
HMG is trailing plans to share revenues to incentivise local authorities to welcome oil development. This is very much on the right track, though I would go further: let programs be configured to encourage local authorities to compete for funding, so that they share (say) ten percent of incremental tax receipts; and bid against each other for a further ten percent for development or remediation.
The Petroleum Act (1934) appropriated subterranean hydrocarbon rights from the land-owner to the Crown, at odds with other mineral rights. This anomaly was theoretical until now, as no substantial deposits had been discovered. In light of new technologies we need to reverse this policy which was recapitulated in the Petroleum Act (1998). The clauses concerned should be repealed so that the interests of land-owners are aligned with the public interest in low-cost energy.
This takes us to taxation. Oil prospecting is beset by a complex of penal taxes, compensating exemptions plus a history of opportunistic impositions. All of this adds to investment uncertainty. HMG should set itself to remove fiscal risk from the investment equation, by introducing a regime of simplified tax treatment for newly-lifted deposits of land-based hydrocarbons, to which it commits itself for at least the next ten years.
The quite fascinatingly stupid case of the minimum carbon price
The Wall Street Journal picks up on the quite fascinatingly stupid imposition by the current government of a minimum price on carbon permits. This could only have been done by people entirely ignorant of how a cap and trade system works: not a wholly desirable attribute in those supposedly running a cap and trade system.
The European Parliament's rejection this week of the Commision's proposed carbon-permit price-fixing scheme is good news for economies across Europe—except for the U.K.'s, which is likely to suffer from the lower carbon-emissions prices that result...........The carbon price floor, which came into effect April 1, was supposed to increase investment in "green" energy projects in the U.K. by ensuring that carbon-permit prices could not fall below a certain level—starting at £16 per ton of carbon this year and rising to £30 per ton in 2020............The European Commission's idea for shoring up the price of carbon permits—withholding the supply of permits from the market—was voted down this week by the Parliament, and the permit price only fell farther. As of Thursday is stood at €2.80 (£2.40) a ton—just 15% of the Cameron government's floor.
I know, I know, many of you are more sensible than I am when it comes to this climate change thing. I'm still under the delusion that it's a problem we should do something about. But at least I do understand the role of price in a cap and trade system. In a carbon tax system, the other viable alternative action, it is the tax, the price of carbon emissions, that reduces them. In a cap and trade system it is instead the number of permits issued which reduces emissions. The price for such a permit is simply telling you how tough it is to meet that cap. Thus, the lower the price of the permit the better for all. It shows that reducing emissions is actually quite simple and quite cheap.
In this case, we're seeing that eliminating the marginal emissions necessary to stay under the cap costs less than £2.40 a tonne. Quite why the British government insists that everyone should pay £16 a tonne for it is known only to the more frenzied minds within it. In a cap and trade system a low price for permits is a good idea, a welcome sign that it's all less of a problem than we had thought.
As I say I do indeed think that carbon emissions are a problem that we ought to do something about. But I do also think that we should not use this as an excuse to do fascinatingly stupid things: like artificially raising a price that we are gloriously grateful about being low. The cost of reducing emissions that is.