Climate Change Workshop Presentation

1. Climate Change Workshop Presentation Rod Duncan Charles Sturt University Institute for Land, Water and Society

2. What is an economist not going to talk about? • The science of climate change

3. What can an economist add to this debate? • Developing institutions to deliver a solution to a social problem is one of the core uses of economics- “What do economists do?” • Changing laws about flood insurance can encourage developers to put fewer homes in flood plains. • Fixing Federal and State regulations governing hospitals can lead to lower costs for delivering medical services. • Implementing an emissions trading scheme can change behaviour and lead to lower levels of carbon emissions.

4. What can an economist add to this debate? • Economists use complex models predicting human behaviour to develop institutions to achieve a social goal. Our climate change policies fall squarely in this realm. • Economics can not inform your decision about whether climate change is happening, but economics can inform you about whether proposed policies might slow down or speed up climate change. • Given a long history of policy analysis in economics, what do economists know? What tends to happen? The good and the bad.

5. What our models say? IPCC AR4

6. The bad: Humans are crap at prediction!

7. What happened next? Picking on economists

8. Predictions • Moral: Humans are terrible at predicting the future. Economists- who predict for a living- are also terrible! • My concern is that our love of prediction and our possession of models gives us a false sense of security. There is an illusion of control that comes with prediction. The future may be far better or far worse. • Prediction of climate change impacts relies on our prediction of: • Events 100 years in the future • Human behaviour • Advances in technology

9. Terrible predictions 1 • Anyone who was around in the 1980s remembers the “Japan is taking over the world” panic. • What is your bet about the current “China is taking over the world” panic?

10. Terrible predictions 2 (From the 1972 version of Ehrlich’s book) “… a minimum of ten million people, most of them children, will starve to death during each year of the 1970s. But this is a mere handful compared to the numbers that will be starving before the end of the century.” (p. 3)

11. Terrible predictions 3 • An informal group calling itself the “Club of Rome” and academics at MIT predicted a future of resource shortages and rapidly-rising populations leading to an environmental collapse by early 21st century.

12. Limits to growth? • Turner (2008) re-ran the Club of Rome simulations and plotted in observed reality (the purple dots). • In Figure 7, the “standard run” for LtG had production of food per capita collapsing around 2020. • Time to buy grains futures?

13. Why are we so bad at prediction? Long stretches of time • This is a view of Oxford Street, Sydney, in 1910. • About a great a stretch of time separates us from 1910 as separates us from 2100. • Would we in 1910 have been successful at predicting the world in 2010? This image is from the City of Sydney's Sydney Streets exhibition : http://www.cityofsydney.nsw.gov.au/history/SydneyStreets

14. Human behaviour is hard to predict (see GFC) • It’s much easier if our models do not include humans (or at least human choices) at all. • Ehrlich and the Club of Rome failed to include human choices and behaviour in their models. • Our global climate models (general circulation model or GCM) painstakingly model the physics and chemistry of climate change but have no humans in them. Carbon emissions grow at 6% per annum or some other assumption.

15. Predicting future technology • Humans are truly awful at predicting what paths technological progress will follow. According to this TV show, in the 23rd century we have: • Faster than light travel • Phaser weapons • Ugly polyester uniforms? • No cellphones or iPads? • No huge flatscreen displays? • Webcams? Facebook?

16. The good news: Costs of change • We also know that costs of change are often far lower than estimates made before the change happens. • Humans believe that a change will be more difficult than the change usually turns out to be. • Humans under-estimate human ingenuity: our capacity to learn and change and our capacity to solve problems.

17. What is likely to be the cost of the Murray-Darling Basin Plan? • The MDBA is planning to acquire 3,000-4,000 GL of irrigated farm water through purchases and efficiency measures (30-40% of current total used). • The debate has focussed on the loss in agricultural output. (Ignoring the benefits from a healthier MDBP, the costs of poorly misspent taxes for farm irrigation efficiency and many other factors.) • The MDBA estimates that with a reduction of 30-40% in water allocations, the gross value of irrigated output will drop 13-17% or $0.8-$1.1 billion per year.

18. But is this likely to be true? How costly is a 30-40% reduction? • We’ve already had a natural experiment in reduction of water use in the MDB. The recent drought in the MDB reduced irrigator water allocations. From a Wentworth Group press release:

19. A drop of 13-17% in farm incomes is likely an over-estimate • If gross farm income falls by 20% due to a 70% reduction in water allocation, how much of a drop in income will a 30-40% drop in water allocation in the MDB cause? • Remember also this is gross, not net, farm income. The impact on net farm incomes will be less. • The water rights will be purchased from the farmers. Farm incomes (including water sales) will be higher than without the Plan. • Over longer time periods, and without the uncertainty of a drought, farmers will change the way they farm, introduce new technologies and new crops and adjust to the lower water allocations.

20. But the over-estimation of costs of change is a persistent pattern • The US Office of Technology Assessment (1995) review of OSHA found a pattern of over-estimation of costs of adoption for workplace safety rules. • Harrington, Morgenstern and Nelson (1995) reviewed EPA and OSHA rules and found that, where economic incentives were used, costs of compliance were uniformly over-estimated. • Chestnut and Mills (2005) found that the estimated costs for SO2 and NOx reductions in the US in 2010 were half the level predicted in 1991. They cited flexibility and new technology as key.

21. Supply versus demand of new technologies (some economics) • My bet: We will not solve climate change by un-inventing technologies. Humans are far too attached to the benefits of technology. We need a technological solution. What it is, we don’t know. [See “prediction of new technology”.] • But we can increase the supply and demand for technological solutions. Government subsidy of research increases the supply of new technological solutions. • But we should also be thinking about increasing the demand for solutions.

22. Benefits of a low carbon tax • A carbon tax would prompt the private sector into thinking about solutions- increasing the demand for solutions. • Even a low carbon tax is an improvement over a free price for carbon emissions.

23. Addendum

24. What is the biggest (short-term) risk to an ETS? • Any climate change policy faces a large political risk in an environment where the political parties are so divided on the issue. • When the opposition gets into power, what will happen to a carbon tax or ETS? • If you were a power generator, one of your assets may be the emissions permits you have purchased. What happens to the value of those assets when government policy changes?

25. From WSJ July 12, 2010 • This is the market price for SO2 emissions allowances. • A court decision in 2008 altered the way the Federal EPA could regulate SO2 emissions- requiring less market-based solutions and more direct regulation. • The market for emissions allowances collapsed. What had been a success story for market-based programs was ended by a court decision.

26. Peeing in the public pool • Argument: Australia is a small emitter of carbon on a world-wide scale. What is the value of Australia acting unilaterally? • Argument: If I pee in a public pool, it’s just a small release of urine in a large pool. What difference does it make to people also swimming in the pool? • It’s the same argument.