Volume LV Number 4
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The economics and politics
What the Americans call “cap and trade”, Europe and Australia call an emissions trading scheme (ETS). It works in the following way. Governments place a cap on an emitter’s level of emissions. As an alternative to reducing emissions to the capped limit, the emitter can buy credits either from other emitters who have reduced emissions below their cap, or from developers of emission-reducing projects, typically in poorer countries. In the latter case, credits are awarded only if a certifier hypothesises before an emissions-reducing activity is undertaken, that it would not occur unless the credits are awarded: the creditable activity must be “uneconomic” without the credits. It is perverse to create a reward for otherwise uneconomic activities. Certification involves making a prediction, and is inherently subjective and impossible to audit effectively. After the credits are certified, there should be an audit to verify the creditable activity has taken place, which may be years later. The US Government Accountability Office reported on the UN’s Clean Development Mechanism:
some offset credits were awarded for projects that would have occurred even in the absence of the CDM, despite a rigorous screening process. Such projects do not represent net emission reductions and can compromise the integrity of programs ... that allow the use of CDM credits for compliance.
Christopher Booker has pointed out that 50 per cent of all “certified emission reduction credits” under the UN’s Clean Development Mechanism were being bought from China, the world’s biggest carbon dioxide emitter, which has been building an average of two coal-fired power stations a week. China has generated these credits from its massive “uneconomic” program of hydroelectric projects, of which the Three Gorges scheme on the Yangtse is an example. (Hydroelectricity is the cheapest form of power. So how were these credits certified?) The Asian Development Bank in 2006 estimated China would obtain an annual income of up to US$2.25 billion from selling credits.
Typically under an ETS, an emitter in a rich country may face the prospect of expensive changes to come within its cap—for example by changing from coal to gas to generate electricity. As an alternative to reducing its emissions, the emitter is allowed to purchase carbon offsets arising from a certified project in a developing country. It will do this if the offsets are cheaper, which is often the case. In this way emitters in rich countries do not have to change their ways. Nor, because of the hazards of certification, can there be any confidence about a meaningful reduction of emissions in the poor country.
One of the problems with a cap on existing emitters is how to set the level of the cap. The US Government Accountability Office reported on Phase 1 of Europe’s ETS that “in 2006, a release of emissions data revealed that the supply of allowances—the cap—exceeded the demand, and the allowance price collapsed. Overall, the cumulative effect ... on emissions is uncertain because of a lack of baseline emissions data.” As Russia’s industrial output declined after the base date for emissions under the Kyoto Protocol, the Russians had excess allowances they could trade—what has come to be called “the Russian problem”. A common criticism is that an ETS has the perverse effect of rewarding the biggest emitters.
In December 2009 Europol, the European criminal intelligence agency, warned that ETS fraud had resulted in around €5 billion in lost revenues and as much as 90 per cent of the entire market volume on emissions exchanges was caused by fraudulent activity. In late April 2010 there were twenty-five arrests in the UK and Germany for ETS fraud, involving more than a hundred suspects employed by banks and energy traders. A Europol official, Rafael Rondelez, has described the ETS as “an incredibly lucrative target for criminals”. This is because a carbon credit is “an intangible good ... With this, it’s just the click of a mouse.”
Suggesting that the market is the best mechanism for setting the carbon price is to ignore the events that led to the GFC, for which one of the triggers was speculation in derivative instruments. Enron and Lehman Brothers were vociferous advocates of carbon pricing. An ETS adds volatility to the financial system.
The claim that business needs an ETS to “obtain certainty” is spurious. Europe has an ETS, but the price of carbon has been volatile and the market has crashed three times since it began in 2005. A carbon tax can provide certainty during periods when governments do not adjust the rules. But an ETS is inherently volatile and adds extra uncertainty into business decisions.
An ETS was successfully adopted for eliminating sulphur dioxide emissions (which were causing acid rain) and chlorofluorocarbons (CFCs) that were depleting atmospheric ozone (which filters out dangerous ultraviolet radiation). In both cases the emission sources could be more easily identified and were less pervasive than carbon dioxide emissions (less than 4 per cent of carbon dioxide emissions are caused by human activity), and there were emission-reduction strategies that could be readily adopted.
Except for nuclear power, there are no straightforward strategies for reducing dependence on fossil fuels without large economic costs. Wind and solar generators often cannot function when needed. Wind machines operate at only about 25 per cent capacity in the UK. Even when the wind is blowing, “back-up capacity, usually gas-fired ... had to be kept running, using fuel, generating steam, emitting CO2, ready to ramp up its turbines the moment sufficient supply from the wind machines stopped coming”. Two main obstacles with renewables are the difficulty of establishing transmission lines from sunny or windy places to where the power is needed and the absence of utility-scale storage technology for intermittent renewable energies. A US comparison estimated the following electricity generation costs per kilowatt hour: hydroelectric $0.03; nuclear and coal $0.04; wind power $0.08; natural gas $0.10 (other estimates for gas suggest about $0.04); solar power (construction costs only, ignoring production costs for which reliable data were unavailable) $0.22.
The technology for carbon capture and sequestration has yet to be developed for integration with fossil fuel power plants. Carbon sequestration might double the cost of electricity—or more. Stripping out the carbon dioxide from exhaust gases is energy intensive, cutting output of a plant by as much as 28 per cent. Existing power plants would require large pipelines carrying carbon dioxide under high pressure, sometimes over long distances, to massive voids in the earth or ocean, that are able to hold the gas without leakage. The only current viable alternative to burning fossil fuels is to go nuclear. Although current known reserves of uranium are limited, it is likely that by developing new nuclear technologies and with new sources of uranium, humanity’s electricity needs could be satisfied by nuclear power for many hundreds of years or more.
Once it is created, an ETS, like a system for licensing taxis, is difficult to change, even if it is not working. A new class of property owners—holders of carbon credits—is created, with a vested interest in the status quo. James Hansen of NASA, a leading climate scientist and AGW activist, has claimed an ETS rewards polluters, and denounces it as like the medieval system of papal indulgences. Hansen instead advocates “an increasing carbon tax” starting at $1 per gallon of petrol and rising in future years.
The precautionary principle requires that a mechanism for controlling emissions can adjust to changing circumstances. A carbon tax (unlike an ETS) satisfies this requirement. But what level should it be set at? Assuming the correctness of the strong AGW case, estimates of climate damage functions vary from $15 to $300 per tonne of carbon. The level at which the tax is set will be an exercise in dartboard economics. Moreover it is a recipe for continuing uncertainty as politicians keep changing their minds, as they always do with taxes. Business cannot get certainty from a carbon tax. The only certainty for business is no carbon tax.
A carbon tax set at a level high enough to change human behaviour cannot be made to work in a democracy. The 2010 Hartwell Paper was published under the auspices of Oxford University and the London School of Economics, and the fourteen co-authors comprise a distinguished interdisciplinary group of experts, including a lead IPCC author, political scientists and economists. Instead of a high-rate carbon tax, they recommend a carbon tax where all tax receipts are hypothecated to fund energy innovation, and the tax is set at a low rate that is unlikely to significantly modify consumer behaviour. They report:
Recent accumulating experience suggests that whereas it might seem straightforward to use taxation to modify consumer behaviour by setting a carbon price, energy demand is pretty inelastic and it has not proved possible to create carbon tax regimes that are simultaneously efficient in reducing demand or in stimulating innovation and that are accepted or even well tolerated by democratic societies.
Energy demand is “pretty inelastic” because people will not choose other goods or services to substitute for energy that keeps them warm or cool, cooks their food and provides transportation. Mechanisms such as a carbon tax are intended to send a price signal to consumers that they should consume less energy that is carbon intensive. But if alternative energy sources are limited, people will still choose to consume carbon-intensive energy, unless the price is set at a prohibitive level. In Western democracies an ETS or carbon tax would normally be accompanied by a proposal to compensate poorer voters for the higher price, so they do not have to change their behaviour. Neither the rich not the poor will turn off their radiators and the price signal will be ineffective.
Punitive measures that actually reduce carbon dioxide emissions are most likely to affect poor people who currently lack access to electricity. The Hartwell Paper points out:
Present estimates suggest that about 1.5 billion people worldwide lack access to electricity. Many scenarios for the “successful” implementation of mitigation policies leave what we believe to be an unacceptable number of people literally in the dark. For instance, the International Energy Authority’s (IEA) 2009 450 Scenario to 2030 has global emissions for a trajectory to stabilisation at 450 ppm carbon dioxide; yet 1.3 billion people worldwide remain without access to electricity ... such scenarios inescapably paint a picture of rich countries who value limiting emissions over economic development elsewhere in the world ... We believe that leaving more than a billion people without access to electricity by 2030 would represent policy failure.
Population pressure is a major driver of carbon dioxide emissions, loss of biodiversity and environmental degradation. Punitive measures to reduce carbon dioxide emissions are likely to prolong poverty. Poorer people in countries where access to education is limited have more children. Measures to increase education levels for both sexes and sexual equality in poor countries may be more effective in reducing carbon dioxide emissions than measures directed specifically at emissions, which may exacerbate the problem.
An ETS was attractive to investment banks and industry participants keen to trade in carbon credits, and to supranational bodies such as the UN and EU, as the awarding and trading of carbon credits required supervision by an international body. Relative to a carbon tax, an ETS was also attractive to politicians as it was a hidden tax, and to consultants as there were many more consulting opportunities with an ETS. We use the past tense, because the international adoption of an ETS is improbable after the media non-event of the two-week Cancun talkfest in 2010, and the Copenhagen debacle in 2009, with China and India not co-operating, and Obama’s retreat from climate change action following the mid-term congressional election.
Politics has oversimplified the AGW debate and politicians have relied on phoney economic projections such as Britain’s Stern Report. The Hartwell Paper points out:
plausible futures using computer models ... are sufficient to undergird just about any view of the future that one prefers ... the “projective” models they produce have frequently been conflated implicitly and sometimes wilfully with what politicians really want ... that is precise forecasts of the future.
One of the simplifications of climate change politics has been to ignore other man-made greenhouse gases. The Hartwell authors point out: “Shine and Sturges estimated that 40 per cent of the heat trapped by anthropogenic gases in the Earth’s atmosphere is due to gases other than carbon dioxide.”
Politics has led to crude sloganeering. Australia’s proposed Carbon Pollution Reduction Scheme is a misnomer. It is a scheme to reduce carbon dioxide, not carbon. Carbon in the form of airborne soot is a pollutant. Carbon dioxide is not. Astronauts and nuclear submarine crew breathe an atmosphere with carbon dioxide controlled to or equal to 8000 ppmv, and it comes out in our breath at about 40000 ppmv or over 100 times the current carbon dioxide content of the atmosphere, which is 390 ppmv. Carbon dioxide is a crop nutrient without which we would simply perish. Added at a level of 500 ppmv or more to the atmosphere of greenhouses growing tomatoes, it increases production levels by 15 to 20 per cent.
Much of the politics of climate science is being driven by the UN and its agency, the IPCC. The IPCC process, with dozens of authors from a number of countries co-operating to produce lengthy assessment reports—there have been four so far—has enforced a team mentality and discouraged dissent. The apparently unstoppable express train for climate action crashed with the UN’s 2009 Copenhagen conference and the Climategate e-mails.
If AGW is a big problem, one of the main obstacles to a solution is Green opposition to nuclear power. This is a damaging contradiction at the heart of global warming politics. In a recent interview a climate scientist and leading advocate for action against climate change, James Hansen, acknowledged the limits of renewables and endorsed nuclear power as comparable to coal in cost, and recommended fourth-generation nuclear technology as this burns all of the fuel—not just 1 or 2 per cent as with current nuclear reactors—and eliminates the waste problem.
Identifying big problems enhances scientists’ access to funding. It is interesting that the climate scientists Hubert Lamb, who founded the Hadley Climate Research Unit, and Stephen Schneider, two early supporters of a strong AGW effect, at first raised the possibility of a new ice age. The IPCC with its four assessment reports has been an enormous project over more than a decade, involving thousands of scientists. Big projects justify themselves by identifying big problems and recommending big solutions.
There are parallels with the Human Genome Project. Ten years ago the leaders of the Human Genome Project predicted “personalised medicine” was likely to emerge by 2010 from their project to sequence human DNA. President Clinton predicted it would “revolutionise the diagnosis, prevention and treatment of most, if not all, human diseases”. This has not happened. One of the breakthroughs expected was the discovery of “common variants” in the genome spreading to say 5 per cent of a population and causing disease, and allowing treatments for a wide range of patients. Dissenters, a self-described “lunatic fringe”, argued this was unlikely for statistical (evolutionary) reasons, and that combinations, differing from individual to individual, of rare variants, were more likely to cause genetic susceptibility to a disease. The lunatic fringe dissenters have become the majority and an early proponent of the Human Genome Project now says, “The vast majority of [common] variants have shed no light on the biology of diseases.”
The sparseness of medical outcomes so far from the Human Genome Project cannot be fudged. But until the climate sends an unequivocal signal, the IPCC, another big project like the Human Genome Project, can continue to make claims such as “2500 of the world’s leading scientists have reached a consensus that human activities are having a significant influence on the climate”. A lead IPCC author, Mike Hulme, has pointed out that such claims “are disingenuous. That particular consensus judgement, as are many others in the IPCC reports, is reached by only a few dozen experts in the specific field of detection and attribution studies; other IPCC authors are experts in other fields.”
The best-selling author Michael Crichton had an MD from Harvard and undertook a post-doctoral fellowship at the Salk Institute. He was a vocal AGW sceptic. In his 2003 Caltech Lecture, “Aliens Cause Global Warming”, he mocked consensus science:
I regard consensus science as an extremely pernicious development that ought to be stopped cold in its tracks. Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming the matter is already settled ... the work of science has nothing whatever to do with consensus. Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world ... Consensus is invoked only where the science is not solid enough ... Nobody says the consensus is that the sun is 93 million miles away. It would never occur to anyone to speak that way.
John Ioannidis, described by the Atlantic as “a meta-researcher ... one of the world’s foremost experts on the credibility of medical research” and perhaps “one of the most influential scientists alive” found in his famous and provocatively titled paper “Why Most Published Research Findings are False”:
A research finding is less likely to be true when the studies conducted in a ﬁeld are smaller; when effect sizes are smaller; when there is a greater number and lesser preselection of tested relationships; where there is greater ﬂexibility in designs, deﬁnitions, outcomes, and analytical modes; when there is greater ﬁnancial and other interest and prejudice; and when more teams are involved in a scientiﬁc ﬁeld in chase of statistical signiﬁcance. Simulations show that for most study designs and settings, it is more likely for a research claim to be false than true. Moreover, for many current scientiﬁc ﬁelds, claimed research ﬁndings may often be simply accurate measures of the prevailing bias.
His conclusion was: “It can be proven that most claimed research ﬁndings are false.”
Several of his “corollaries” indicating that medical research findings are likely to be false may be applied to climate studies: the smallness of “effect sizes”, being global average temperature changes of fractions of a degree on which many climate studies rely; the large number of relationships (with sun, clouds, albedo, aerosols, greenhouse gases and oceans interacting); the flexibility of design (for example replacing an inconvenient part of a tree-ring sequence with thermometer measurements); and the large teams of climate scientists chasing results of statistical significance with the encouragement of carbon traders, bankers, consultants and the renewable energy industry. Ioannidis’s findings have been “widely accepted by the medical community” and he has become a celebrity speaker at international medical conferences (so much so that he has cut back on commitments, because of vertigo from excessive travel). The politicisation of climate science means that it is yet to experience its Ioannidis moment.
As Lenin once said, “What is to be done?” The un-Leninist answer may be that Australia should do nothing to reduce its carbon dioxide emissions, if we do not wish to embrace the nuclear power option. Non-cosmetic reductions of emissions do not come cheap. The UK Climate Change Act 2008 legislates for an 80 per cent reduction from the 1990 level of UK carbon dioxide emissions by 2050. To achieve this ambitious target will cost £14.7 to £18.3 billion annually over forty years according to the UK’s Department of Energy and Climate Change. (Benefits are estimated at up to more than double the cost.) Britain, unlike Australia, has nuclear power plants. The cost for a nuclear-free Australia of an equivalent program would be much greater per head of population and is not politically sustainable.
Richard Lindzen has pointed out that much of the radiative effect of carbon dioxide emissions has already occurred. The next 100 ppmv added by mankind will have only about half the effect of the first 100 ppmv. The scientific case for a strong AGW effect is weak. The hockey stick, promoted by the IPCC and Al Gore, has serious statistical errors. It misrepresents past temperatures. Global average temperatures have not risen as models predicted. Despite its ETS, Europe’s contribution to carbon dioxide emissions increased by 1.5 per cent in the first two years of operation. Since the Kyoto Protocol of 1997, carbon dioxide emissions from fossil fuels and cement production have significantly increased. Developing nations will not adopt an ETS or carbon tax that impedes the economic growth they need to lift their populations out of poverty. They are not waiting for a signal from Australia, a country with less than 2 per cent of the world economy.
As proposed by Bjorn Lomborg, there are many worthwhile causes to fund with our taxes and philanthropic dollars that rank ahead of possible global warming—such as ensuring safe drinking water and educating both sexes in poor countries, eliminating malaria and other tropical diseases, maintaining biodiversity and cleaning up real pollutants. Adaptation to adverse climate change, if and when it does occur, may be the best and only viable strategy.
Geoffrey Lehmann is a poet. He was formerly a partner of a major international accounting firm and Chairman of the Australian Tax Research Foundation.
Peter Farrell is Founder and Executive Chairman of Resmed Inc, foundation Director and former Professor of the Graduate School of Biomedical Engineering at the University of New South Wales, Chair of the Executive Council, Division of Sleep Medicine, Harvard Medical School and Member Visiting Committee, Whitaker College of Life Sciences MIT.
Dick Warburton is Chairman of Westfield Retail Trust, Magellan Flagship Fund Ltd and the Board of Taxation and a Director of Citigroup Pty Ltd and of the Smith Family of which he is also Chairman-elect. He is a former Chairman and CEO of Du Pont Australia and New Zealand.
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