Survival on a Budget

April 23, 2014


Red curve – business as usual. Blue curve – mitigation which limits climate forcing to 550 ppm CO2-eq Green curve – massive mitigation effort which limits forcing to 400 ppm (i.e. less than 2 °C warming) The 8-fold increase in GDP in 2100 is just reached 1.5 years later in the 400 ppm scenario. Impacts of climate change damage for high emissions NOT included. Source: Potsdam Institute for Climate Impact Research

The graph above is not a realistic prediction of what the cost of climate change will be to the global economy. It is not meant to be. What it is meant to do is illustrate the relatively slight cost of actually dealing with climate change proactively, transforming to a renewable based economy. According to a model by Germany’s Potsdam Institute, an aggressive program to keep the planet under 2 degrees C warming in this century would mean reaching a level of prosperity 8 times above today’s, about a year and a half later than if we did nothing.

It is understood that doing nothing would bring untold damages to the real economy – those damages are deliberately left out of the graph – so as to show the relative small cost we need pay for survival of human civilization as we know it.

Paul Krugman, NYTimes:

Other things equal, more G.D.P. tends to mean more pollution. What transformed China into the world’s largest emitter of greenhouse gases? Explosive economic growth. But other things don’t have to be equal. There’s no necessary one-to-one relationship between growth and pollution.

People on both the left and the right often fail to understand this point. (I hate it when pundits try to make every issue into a case of “both sides are wrong,” but, in this case, it happens to be true.) On the left, you sometimes find environmentalists asserting that to save the planet we must give up on the idea of an ever-growing economy; on the right, you often find assertions that any attempt to limit pollution will have devastating impacts on growth. But there’s no reason we can’t become richer while reducing our impact on the environment.

Let me add that free-market advocates seem to experience a peculiar loss of faith whenever the subject of the environment comes up. They normally trumpet their belief that the magic of the market can surmount all obstacles — that the private sector’s flexibility and talent for innovation can easily cope with limiting factors like scarcity of land or minerals. But suggest the possibility of market-friendly environmental measures, like a carbon tax or a cap-and-trade system for carbon emissions, and they suddenly assert that the private sector would be unable to cope, that the costs would be immense. Funny how that works.

The sensible position on the economics of climate change has always been that it’s like the economics of everything else — that if we give corporations and individuals an incentive to reduce greenhouse gas emissions, they will respond. What form would that response take? Until a few years ago, the best guess was that it would proceed on many fronts, involving everything from better insulation and more fuel-efficient cars to increased use of nuclear power.

One front many people didn’t take too seriously, however, was renewable energy. Sure, cap-and-trade might make more room for wind and the sun, but how important could such sources really end up being? And I have to admit that I shared that skepticism. If truth be told, I thought of the idea that wind and sun could be major players as hippie-dippy wishful thinking.

But I was wrong.

The climate change panel, in its usual deadpan prose, notes that “many RE [renewable energy] technologies have demonstrated substantial performance improvements and cost reductions” since it released its last assessment, back in 2007. The Department of Energy is willing to display a bit more open enthusiasm; it titled a report on clean energy released last year “Revolution Now.” That sounds like hyperbole, but you realize that it isn’t when you learn that the price of solar panels has fallen more than 75 percent just since 2008.

Thanks to this technological leap forward, the climate panel can talk about “decarbonizing” electricity generation as a realistic goal — and since coal-fired power plants are a very large part of the climate problem, that’s a big part of the solution right there.

Ambrose Evans-Pritchard in the Telegraph: 

Solar power has won the global argument. Photovoltaic energy is already so cheap that it competes with oil, diesel and liquefied natural gas in much of Asia without subsidies.

Roughly 29pc of electricity capacity added in America last year came from solar, rising to 100pc even in Massachusetts and Vermont. “More solar has been installed in the US in the past 18 months than in 30 years,” says the US Solar Energy Industries Association (SEIA). California’s subsidy pot is drying up but new solar has hardly missed a beat.

The technology is improving so fast – helped by the US military – that it has achieved a virtous circle. Michael Parker and Flora Chang, at Sanford Bernstein, say we entering a new order of “global energy deflation” that must ineluctably erode the viability of oil, gas and the fossil fuel nexus over time. In the 1980s solar development was stopped in its tracks by the slump in oil prices. By now it has surely crossed the threshold irreversibly.

The ratchet effect of energy deflation may be imperceptible at first since solar makes up just 0.17pc of the world’s $5 trillion energy market, or 3pc of its electricity. The trend does not preclude cyclical oil booms along the way. Nor does it obviate the need for shale fracking as a stop-gap, for national security reasons or in Britain’s case to curb a shocking current account deficit of 5.4pc of GDP.

But the technology momentum goes only one way. “Eventually solar will become so large that there will be consequences everywhere,” they said. This remarkable overthrow of everthing we take for granted in world energy politics may occur within “the better part of a decade”.

If the hypothesis is broadly correct, solar will slowly squeeze the revenues of petro-rentier regimes in Russia, Venezuela and Saudi Arabia, among others. Many already need oil prices near $100 a barrel to cover their welfare budgets and military spending. They will have to find a new business model, or fade into decline.

Chris Hayes in The Nation:

Before the cannons fired at Fort Sumter, the Confederates announced their rebellion with lofty rhetoric about “violations of the Constitution of the United States” and “encroachments upon the reserved rights of the States.” But the brute, bloody fact beneath those words was money. So much goddamn money.

The leaders of slave power were fighting a movement of dispossession. The abolitionists told them that the property they owned must be forfeited, that all the wealth stored in the limbs and wombs of their property would be taken from them. Zeroed out. Imagine a modern-day political movement that contended that mutual funds and 401(k)s, stocks and college savings accounts were evil institutions that must be eliminated completely, more or less overnight. This was the fear that approximately 400,000 Southern slaveholders faced on the eve of the Civil War.

Today, we rightly recoil at the thought of tabulating slaves as property. It was precisely this ontological question—property or persons?—that the war was fought over. But suspend that moral revulsion for a moment and look at the numbers: Just how much money were the South’s slaves worth then? A commonly cited figure is $75 billion, which comes from multiplying the average sale price of slaves in 1860 by the number of slaves and then using the Consumer Price Index to adjust for inflation. But as economists Samuel H. Williamson and Louis P. Cain argue, using CPI-adjusted prices over such a long period doesn’t really tell us much: “In the 19th century,” they note, “there were no national surveys to figure out what the average consumer bought.” In fact, the first such survey, in Massachusetts, wasn’t conducted until 1875.

In order to get a true sense of how much wealth the South held in bondage, it makes far more sense to look at slavery in terms of the percentage of total economic value it represented at the time. And by that metric, it was colossal. In 1860, slaves represented about 16 percent of the total household assets—that is, all the wealth—in the entire country, which in today’s terms is a stunning $10 trillion.

Ten trillion dollars is already a number much too large to comprehend, but remember that wealth was intensely geographically focused. According to calculations made by economic historian Gavin Wright, slaves represented nearly half the total wealth of the South on the eve of secession. “In 1860, slaves as property were worth more than all the banks, factories and railroads in the country put together,” civil war historian Eric Foner tells me. “Think what would happen if you liquidated the banks, factories and railroads with no compensation.”

Josh Barro in the NYTimes:

So one crucial question about the effort to limit carbon emissions — and thereby sharply reduce the value of unextracted fossil fuel resources — is to what extent we have the economic capacity to compensate the owners of those resources rather than simply expropriating them. Mr. Hayes throws out the figure that an effective carbon limitation policy would require the loss of $20 trillion in fossil fuel value. I can’t vouch for the specific figure, but I strongly suspect he’s right that the cost of carbon limitations to the owners of unextracted fossil fuels would be extremely large.

But even an extremely large expense does not have to be insurmountable in comparison with gross world product of $87 trillion. Devoting 1 percent of global economic output to carbon buyouts would make it possible to complete Mr. Hayes’ project by 2040.

The markets for government debt are far deeper and more stable than they were 150 years ago; governments around the world have already borrowed $53 trillion and could borrow more if necessary. If climate change poses the risk of a major economic calamity, that risk should already be priced into government bond markets. Therefore lower carbon emissions should mean greater economic stability and make sovereign debt a better buy, even if governments are more indebted.

And Mr. Hayes’s $20 trillion cost figure for carbon limits is a gross figure, not a net one. Averting climate change should increase the global output in the long run and therefore improve the capacity of governments to service their debts

Just because the politics of preventing climate change should work doesn’t mean that they will. I have trouble imagining a less popular policy proposal than the United States borrowing a huge amount of money to pay Saudi Arabia not to extract oil — even if that policy actually would make Americans better off. Even when the beneficiary of buyout payments isn’t a foreign government of questionable repute, the barriers would be huge. It would call for international cooperation and resisting the temptation to get a free ride on other countries’ expenses.

But reducing carbon emissions doesn’t have to be an either/or choice between buyouts and expropriation of existing resources. Sometimes, one will be more politically feasible than the other, and an effective policy approach can use a blend of the two. In particular, we can take advantage of the fact that a required reduction in fossil fuel production would be partly offset by a rise in prices for those fossil fuels that do get extracted.

Some policies, like carbon taxes, divert those price increases to the government. Others, like cap-and-trade schemes, can be designed to let the incumbent owners of mineral rights reap the benefits of higher prices. Proposals that give the value of the right to emit carbon to the existing carbon emitter may be a necessary and effective strategy to buy political support for carbon limits. These approaches look like a giveaway, but it’s worth making the giveaway if that’s what brings the benefits of stable temperatures.



13 Responses to “Survival on a Budget”

  1. kap55 Says:

    Do you have a link or a citation for the Potsdam study?

  2. One problem with the claim that “solar getting cheaper will kill everything else” is that it doesn’t exist in a vacuum.  PV doesn’t provide spinning reserve, overnight power, or a bunch of things that its proponents take for granted; those services must be provided by other things, which consume energy and emit carbon as an inevitable part of their operation and make the net affair subject to diminishing returns.  Here is a working paper on the system-wide LCOE of a grid incorporating “VRE” (variable renewable energy).

    • jpcowdrey Says:


      those services must be provided by other things, which consume energy and emit carbon as an inevitable part of their operation and make the net affair subject to diminishing returns.

      One problem with this argument is the assumption is that present resources for ‘spinning reserve’ are unchanging and inevitable, and that research and development of low carbon technologies for energy storage will ultimately bear no fruit.

      • One problem with this argument is the assumption is that present resources for ‘spinning reserve’ are unchanging and inevitable

        You missed the point.  They may not be… but so long as the “renewable” technologies can command the fossil-based sources of regulation and reserves without supporting their costs, you’ve got a mess of shifted impacts and perverse incentives.  Among other flaws, nobody will build any new ones and the old ones may vanish.  There is no incentive to build them into the PV and wind systems if there’s neither a requirement nor compensation.

        and that research and development of low carbon technologies for energy storage will ultimately bear no fruit.

        If no one will pay for them, they’ll likely bear no fruit.  Few will pay for them if it doesn’t yield revenue.  The entities tasked with providing them have to be profitable and able to repay loans, not targeted for bankruptcy by fees and mandates.

        There are several ways of providing regulation and spinning reserve without a fuel-burning machine.  I’d like to see them encouraged, such as large fleets of EVs using V2G.  But we need to put the onus for this provision on the entities which are being paid, through net metering, FITs or PTCs, for generation that doesn’t supply its own.

  3. jimbills Says:

    The belief that we can grow the global economy 8 times what it currently is by 2100 and that either the environmental cost will be none (denier position) or low with a few tweaks and extra cash (liberal economist and techno-optimist position) had better damn well be right.

    Either position is insanity to me, but I acknowledge that a pure status quo (no change) is our most likely outcome and a status quo with a few tweaks and extra cash (like a carbon tax) is about the best we can realistically hope for. If either belief is wrong, though, they’ll both lead to roughly the same place in due time.

  4. […] The graph above is not a realistic prediction of what the cost of climate change will be to the global economy. It is not meant to be. What it is meant to do is illustrate the relatively slight cos…  […]

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